BAIYU (BYU) - 2019 Q4 - Annual Report

PART I Item 1. Description of Business TD Holdings, Inc. operates two primary business lines in China: a used luxurious car leasing business and a non-ferrous metal commodities trading business - The company's current operations consist of leasing luxurious pre-owned automobiles and a non-ferrous metal commodities trading business in China[13] - The company operates through two Variable Interest Entities (VIEs): Beijing Tianxing Kunlun Technology Co. Ltd for the car leasing business and Shenzhen Huamucheng Trading Co., Ltd. for commodities trading[14] - The company disposed of its Micro-lending Business in July 2018 for $500,000 due to high default rates and the inability to meet Nasdaq's minimum stockholder equity or market value requirements[19][21][22] 2019 Revenue by Business Segment | Business Segment | Revenue (USD) | | :--- | :--- | | Used Luxurious Car Leasing | $1,830,148 | | Commodities Trading | $100,427 | | Supply Chain Management Services | $562,586 | Corporate Structure and VIE Arrangements Outlines the company's Delaware holding structure and control over PRC operations through VIEs Beijing Tianxing and Huamucheng via contractual arrangements - TD Holdings, Inc. is a Delaware holding company that controls its PRC operations through a series of subsidiaries and contractual arrangements with two VIEs, Beijing Tianxing and Huamucheng[44] - The company has undergone several name changes, from China Commercial Credit, Inc. to China Bat Group, Inc., then Bat Group, Inc., and finally to TD Holdings, Inc. in March 2020[45][46][47] - The VIE agreements (including Exclusive Business Cooperation, Share Pledge, Exclusive Option, and Power of Attorney) are designed to provide the company's WFOE, Hao Limo, with effective control over the operations and economic benefits of Beijing Tianxing and Huamucheng[53][66] Business Operations Details the operations of the used luxurious car leasing business and the commodities trading segment, including fleet, product focus, and supply chain services - The Used Luxurious Car Leasing business operates with a fleet of 11 owned vehicles valued at $2.43 million, supplemented by a car-pooling arrangement with peer companies[77][81][91] - The Commodities Trading business, launched in November 2019, focuses on non-ferrous metals like aluminum, copper, silver, and gold[99][102][112] - The company also offers Supply Chain Management Services, including distribution services for suppliers (1-1.5% commission) and loan recommendation services for customers (2-5% referral fee)[119][120] Competition and Strategy Outlines the competitive landscape for both car leasing and commodities trading, along with the company's strategic plans for maintaining and expanding its businesses - In the car leasing business, the company competes with established players like Benson, V-FLY Travel, and Wagons[125] - In commodities trading, competitors include large domestic providers such as Xiamen International Trade and Yijian Shares[126] - The company's strategy for the car leasing business is to maintain its current stock and operations, while the commodities trading strategy focuses on expanding into new products (ore, crude oil, coal) and markets (Southeast Asia)[122][123] - Competitive strengths cited include strong risk control measures, transparent pricing, qualified customer service, and an experienced management team for the commodities business[128][131][133] Applicable Government Regulations Discusses PRC regulations affecting foreign investment in car rental, foreign currency exchange, and share incentive plans for domestic residents - Foreign investment in the car rental business is permitted under PRC law, but local regulations in cities like Beijing and Shanghai impose specific requirements, such as filings or special licenses for rental vehicles[142][143][149] - The company is subject to PRC laws on foreign currency exchange, which permit free convertibility for current account items (like dividends) but require approval for capital account items[170] - PRC regulations require domestic residents participating in overseas share incentive plans to register with the State Administration of Foreign Exchange (SAFE)[180] Item 1A. Risk Factors The company faces significant operational, regulatory, and market risks, including limited operating history, VIE structure uncertainties, and COVID-19 impacts - The company's limited operating history in both used car leasing (started May 2018) and commodities trading makes it difficult to evaluate future business prospects[193] - The business is highly dependent on access to desirable vehicle inventory and is sensitive to changes in the prices of pre-owned vehicles, which could affect revenues and margins[212][217] - The commodities trading business is cyclical, and demand can be volatile[251] - The supply chain management services segment derives a substantial portion of its revenue from a small number of clients[261] - The reliance on a VIE structure in the PRC is a major risk, potentially leading to severe penalties including revocation of business licenses if deemed non-compliant by PRC authorities[287][288] - The COVID-19 pandemic poses a significant risk, potentially causing disruptions to the supply chain, closure of facilities, and reduced demand for both car leasing and commodities trading[338][339] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[340] Item 2. Description of Property The company does not own any real property, leasing its principal executive offices in Beijing and an additional office in Shenzhen, China - The company leases its principal executive office in Haidian District, Beijing, with the lease running until September 17, 2020[342] - An additional office is leased in Futian District, Shenzhen, with a lease term from January 1, 2020, to June 30, 2021[343] Item 3. Legal Proceedings The company has settled past class action and derivative lawsuits, dismissed a 2018 matter, and filed a new lawsuit to recover a $1 million investment - The 2014 Securities Class Action, related to the former loan guarantee business, was settled with a payment of $245,000 in cash and the issuance of 950,000 shares of common stock, with the settlement finalized[350][351] - The 2015 Shareholder Derivative Action was settled and dismissed in July 2019, with the company agreeing to adopt certain corporate governance reforms[355][356] - A 2018 court matter with Shanghai Nonobank Financial Information Service Co. Ltd., which sought to recover approximately $3.5 million, was dismissed in its entirety as against the company in July 2019[362][363] - In April 2020, the company filed a lawsuit against Harrison Fund, LLC to recover a $1 million investment made in May 2019, for which the company has recorded a full investment impairment loss due to the uncertainty of recovery[284][364] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[365] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'GLG'; no dividends were paid in 2019, with future payments subject to PRC regulations - The company's common stock is listed on the NASDAQ Capital Market under the symbol "GLG"[366] - The company did not declare or pay any dividends in 2019 and does not plan to in the foreseeable future, citing the need to finance business growth[368] - Dividend distributions are subject to PRC regulations, which require wholly foreign-owned enterprises to set aside at least 10% of after-tax profits into reserve funds until the fund reaches 50% of registered capital[369] Item 6. Selected Financial Data This item is not applicable - Not applicable[370] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenue increased significantly in 2019, but a substantial net loss resulted from surging operating costs and impairment charges, offset by post-year-end equity financing - The significant increase in total revenue was driven by the expansion of the car leasing business and the introduction of the commodities trading and supply chain management services in December 2019[390] - The substantial increase in net loss from continuing operations was primarily due to a sharp rise in operating costs associated with the new and expanded businesses, increased SG&A expenses, and significant impairment charges on various investments totaling over $3.3 million[401][407][408] - The company's liquidity was a concern due to a net loss and cash outflow from operations, but management believes it can continue as a going concern, citing positive working capital, collection of receivables, and significant post-year-end equity financing of $79.5 million[418][421][422] Results of Operations Summary (2019 vs. 2018) | Metric | 2019 (USD) | 2018 (USD) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $2,493,161 | $488,062 | 411% | | Gross Profit | $359,630 | $416,810 | -14% | | Total Operating Costs | ($2,133,531) | ($71,252) | 2,894% | | Net Loss from Continuing Operations | ($6,942,522) | ($2,320,472) | 199% | | Net (Loss) Income | ($6,942,522) | $7,647,157 | -191% | Results of Operations Analyzes the drivers behind the 2019 revenue growth, including the car leasing and new commodities businesses, and explains the surge in operating costs and other expenses - Operating lease income grew 275% year-over-year, driven by an increase in the number of self-owned cars from 6 to 11 and a significant expansion of the sub-leasing business with peer companies and individuals[397][398] - Operating costs increased by 2,894% to $2.13 million, primarily due to a $1.47 million increase in operating lease expenses and the new costs associated with the commodities business[401] - Other expenses totaled $3.31 million in 2019, driven by impairment losses on investment securities ($200,000), financial products ($1,000,000), and equity investees ($2,098,737)[408] Revenue Breakdown (2019 vs. 2018) | Revenue Source | 2019 (USD) | 2018 (USD) | | :--- | :--- | :--- | | Sales of commodity products | $100,427 | $0 | | Supply chain management services | $562,586 | $0 | | Income from operating leases | $1,830,148 | $488,062 | | Total Revenue | $2,493,161 | $488,062 | Cash Flows and Capital Resources Examines the company's cash flow activities, including significant increases in cash used in investing and provided by financing, and highlights post-year-end equity financing - Cash used in investing activities increased significantly to $8.87 million, primarily for purchases of used cars ($2.07 million), investments ($2.07 million), and loans to third parties and related parties[427] - Cash from financing activities was $11.83 million, mainly from registered direct offerings ($4.65 million), borrowings ($3.86 million), and private placements/advances ($2.19 million)[429] - Subsequent to year-end, the company raised approximately $79.5 million in equity financing through private placements and the exercise of notes and warrants, significantly bolstering its liquidity position[421] Summary of Cash Flows (2019 vs. 2018) | Cash Flow Activity | 2019 (USD) | 2018 (USD) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($2,165,632) | ($87,032) | | Net Cash Used in Investing Activities | ($8,873,916) | ($3,272,034) | | Net Cash Provided by Financing Activities | $11,829,704 | $3,806,435 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable - Not applicable[435] Item 8. Financial Statements and Supplementary Data Presents consolidated financial statements for 2019, showing total assets of $11.39 million, liabilities of $5.59 million, and a net loss of $6.94 million, with details on VIEs and subsequent financing - The company adopted ASC 842 (Leases) on January 1, 2019, resulting in the recognition of right-of-use lease assets[645] - The notes confirm that subsequent to year-end, the company raised significant capital, including $13.5 million from a share sale and a further $66 million from the issuance and subsequent exercise of convertible notes and warrants[751][752][756] Consolidated Balance Sheet Highlights (as of Dec 31, 2019) | Account | Amount (USD) | | :--- | :--- | | Total Current Assets | $7,879,880 | | Total Noncurrent Assets | $3,508,520 | | Total Assets | $11,388,400 | | Total Current Liabilities | $5,435,414 | | Total Noncurrent Liabilities | $152,124 | | Total Liabilities | $5,587,538 | | Total Equity | $5,800,862 | Consolidated Statement of Operations Highlights (Year ended Dec 31, 2019) | Account | Amount (USD) | | :--- | :--- | | Total Revenues | $2,493,161 | | Gross Profit | $359,630 | | Net loss from continuing operations | ($6,942,522) | | Net Loss | ($6,942,522) | | Loss Per Share (Basic & Diluted) | ($0.89) | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure - None[435] Item 9A. Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2019, due to material weaknesses in internal control over financial reporting, with remediation plans underway - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were not effective as of December 31, 2019[436] - Management identified material weaknesses in internal control over financial reporting, citing that accounting staff lack sufficient U.S. GAAP experience, leading to material audit adjustments and an inadequate financial closing process[443][444][445] - The remediation plan includes providing additional training for accounting staff and establishing more comprehensive written policies and procedures for financial reporting[446][447] Item 9B. Other Information The company reports no other information - None[448] PART III Item 10. Directors, Executive Officers and Corporate Governance Outlines the company's executive officers, independent directors, and established board committees, noting executive changes and Section 16(a) filing issues - Key executives include Renmei Ouyang (CEO and Chairwoman), Yang An (CFO), Jin Ding (CPO), and Qun Xie (CSO)[450] - The Board has four independent directors: Kecen Liu, Siyuan Zhu, Weicheng Pan, and Jialin Cui[461] - The company has an Audit Committee, Compensation Committee, Nominating and Governance Committee, and a Risk Committee, with Siyuan Zhu identified as the "audit committee financial expert"[462][465][466][467] - The company notes that Section 16(a) filings for officers, directors, and major shareholders were not timely made during fiscal year 2019[469] Item 11. Executive Compensation Details 2019 executive and director compensation, including salaries for named executive officers and cash fees for non-executive directors, with no stock or option awards granted - No stock awards or option awards were granted to the named executive officers during the fiscal year ended December 31, 2019[480][486] - Non-executive director compensation for 2019 consisted of cash fees, with Weicheng Pan receiving $20,000, Kecen Liu receiving $10,000, and Jialin Cui and Siyuan Zhu each receiving $5,000[488] 2019 Executive Compensation Summary | Name and Principal Position | Salary ($) | | :--- | :--- | | Renmei Ouyang (CEO, Former COO) | 50,000 | | Yang An (CFO) | 30,000 | | Jin Ding (CPO) | 40,000 | | Jiaxi Gao (Former CEO) | 40,000 | | Long Yi (Former CFO) | 25,000 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Identifies Shuxiang Zhang as the sole 5% beneficial owner with a 13.006% stake, while directors and executive officers collectively own less than 1% - As of May 29, 2020, Shuxiang Zhang is the only 5% or greater stockholder, beneficially owning 8,920,000 shares, or 13.006% of the class[494] - The company's directors and executive officers as a group (9 persons) beneficially own 0% (less than 1%) of the outstanding common stock[492][494] Item 13. Certain Relationships and Related Transactions, and Director Independence Details significant related party transactions in 2019, including loans, purchases, and services, with notable balances due from and to related parties like Qianhai Baiyu - The company purchased aluminum ingots worth $100,180 from Qianhai Baiyu and also incurred costs of $489,231 for supply chain management services provided by the same related party[506][507] - The company lent approximately $2.84 million to Qianhai Baiyu in December 2019, charging 10% annual interest[510] - The company borrowed funds from several related parties, including a loan of up to $1.3 million from Guangzhou Chengji, an entity controlled by independent director Weicheng Pan[511][512][513] Related Party Balances (as of Dec 31, 2019) | Balance Type | Amount (USD) | | :--- | :--- | | Due from related parties | $3,310,883 | | Due to related parties (current) | $1,017,362 | | Related party loan (noncurrent) | $152,124 | Item 14. Principal Accountant Fees and Services Details principal accountant fees for 2019 and 2018, showing $195,000 in audit fees for 2019, a decrease from $260,000 total in 2018, with all services pre-approved - All audit and non-audit services provided by the independent auditors were pre-approved by the Audit Committee in accordance with its established policies[518] Accountant Fees (2019 vs. 2018) | Fee Type | 2019 (USD) | 2018 (USD) | | :--- | :--- | :--- | | Audit Fees | $195,000 | $120,000 | | Audit-related Fees | $0 | $140,000 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total | $195,000 | $260,000 | PART IV Item 15. Exhibits, Financial Statement Schedules Lists included financial statements and comprehensive exhibits, such as corporate documents, securities agreements, and VIE contracts, with financial schedules omitted - The financial statements and the report of the independent registered public accounting firm are included starting on page F-1 of the report[520] - Financial statement schedules have been omitted because the required information is not present or is included within the consolidated financial statements and notes[521] - Key exhibits filed include various securities purchase agreements from 2019 and 2020, forms of warrants, and the full set of VIE agreements for the Huamucheng commodities trading business[522][523]