Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - Code Chain New Continent Ltd | f10k2019ex32-2_tmsrholding.htm |
| EX-32.1 - CERTIFICATION - Code Chain New Continent Ltd | f10k2019ex32-1_tmsrholding.htm |
| EX-31.2 - CERTIFICATION - Code Chain New Continent Ltd | f10k2019ex31-2_tmsrholding.htm |
| EX-31.1 - CERTIFICATION - Code Chain New Continent Ltd | f10k2019ex31-1_tmsrholding.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-37513
TMSR HOLDING COMPANY LIMITED
(Exact name of registrant as specified in its charter)
| Nevada | 47-3709051 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
180 Qingnian West Road, Hongqiao Building West, 4th Floor |
226001 | |
| (Address of principal executive offices) | (Zip Code) |
Issuer’s telephone number: +86 0513-8912-3630
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class: | Name of Each Exchange on Which Registered: | |
| Common Stock, par value $0.0001 per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
Warrants, each to purchase one-half of one share of Common Stock
Title of Class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock outstanding held by non-affiliates of the registrant, computed by reference to the closing sales price for the common stock of $1.49, as reported on the Nasdaq Capital Market, was approximately $15 million.
As of April 17, 2020, there were 28,514,520 shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding.
TABLE OF CONTENTS
i
As used in this Annual Report, the terms “we,” “us,” “our,” and words of like import, and the “Company” refer to TMSR Holding Company Limited and its subsidiaries unless the context indicates otherwise. “PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this report, Taiwan, Hong Kong and Macau. “RMB” or “Renminbi” refers to the legal currency of China and “$”, “US$” or “U.S. Dollars” refers to the legal currency of the United States.
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report contains statements that may be deemed to be “forward-looking statements” within the meaning of the federal securities laws. These statements relate to anticipated future events, future results of operations and or future financial performance. In some cases, you can identify forward-looking statements by their use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “ought to,” “plan,” “possible,” “potentially,” “predicts,” “project,” “should,” “will,” “would,” negatives of such terms or other similar terms. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The forward-looking statements in this Annual Report include, without limitation, statements relating to:
| ● | our goals and strategies; | |
| ● | our future business development, results of operations and financial condition; | |
| ● | our estimates regarding expenses, future revenues, capital requirements and our need for additional financing; | |
| ● | our estimates regarding the market opportunity for our services; | |
| ● | the impact of government laws and regulations; | |
| ● | our ability to recruit and retain qualified personnel; | |
| ● | our failure to comply with regulatory guidelines; | |
| ● | uncertainty in industry demand; | |
| ● | general economic conditions and market conditions in the financial services industry; | |
| ● | future sales of large blocks or our securities, which may adversely impact our share price; and | |
| ● | depth of the trading market in our securities. |
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those described in Item 1A “Risk Factors.”
You should not unduly rely on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report, to conform these statements to actual results or to changes in our expectations.
ii
General
TMSR Holding Company Limited (formerly known as JM Global Holding Company), through its subsidiaries and controlled entities, focuses its business into three segments: (1) research, development and sale of an array of solid waste recycling systems for the mining and industrial sectors (the “solid waste recycling systems business”); (2) coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap (the “coal and coke wholesale business”); and (3) the research and development, production and sale of Zinc-rich coating materials (the “coating materials business”). The solid waste recycling systems business was carried out by Shengrong Environmental Protection Technology (Wuhan) Co. Ltd. (“Shengrong WFOE”), the Company’s indirect subsidiary. The coating materials business was carried out by Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), the Company’s indirect subsidiary. The Company’s coal and coke wholesale business is carried out by Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), the Company’s VIE entity.
In April 2019, TMSR Holdings Limited (“TMSR HK”), our indirect wholly owned subsidiary, was incorporated under the laws of Hong Kong.
In August 2019, Tongrong Technology (Jiangsu) Co., Ltd. (“Tongrong WFOE”), our indirect wholly owned subsidiary, was incorporated under the laws of PRC.
In August 2019, Citi Profit Investment Holding Limited (“Citi Profit”), an exempted company formed under the laws of the British Virgin Islands, became our wholly owned subsidiary.
TMSR HK, Tongrong WFOE and Citi Profit are all holding companies that do not have any substantive business operations.
Acquisition of Wuge
On January 3, 2020, the Company entered into a share purchase agreement with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) and all the shareholders of Wuge (“Wuge Shareholders”). Pursuant to the share purchase agreement, the Company agreed to issue an aggregate of 4,000,000 shares of TMSR’s common stock to the Wuge Shareholders, in exchange for Wuge Shareholders’ agreement to enter into, and their agreement to cause Wuge to enter into, certain VIE agreements (“VIE Agreements”) with Tongrong WFOE the Company’s indirectly owned subsidiary, through which Tongrong WFOE shall have the right to control, manage and operate Wuge in return for a service fee equal to 100% of Wuge’s net income (the “Acquisition”).
Wuge Shareholders are Wei Xu, who became a director of the Company as a result of the Acquisition, Bibo Lin, who was subsequently appointed as a vice president of the Company, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network Technology Co., Ltd., which is controlled by Wei Xu.
Wuge is a technology company in development stage. It was incorporated in China in June 2019. Wuge Manor, the game Wuge is developing, is the world’s first game that combines Internet of Things (IoT) and e-commerce that is based on Code Chain platform. Through the game, players will be able to have access to hundreds of vendors and business owners in over 100 cities in China, participate in activities those businesses set up and collect points, which can be redeemed as equipment in the game or coupons usable when making purchase at that business. In addition, Wuge produced electronic tokens that can be stored in the Code Chain system to purchase virtual property based on real estate.
On January 3, 2020, Tongrong WFOE entered into a series of VIE Agreements with Wuge and the Wuge Shareholders. The VIE Agreements are designed to provide Tongrong WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Wuge, including absolute rights to control the management, operations, assets, property and revenue of Wuge. Wuge has all necessary license to carry out its business in China.
1
Material terms of each of the VIE Agreements are described below:
Technical Consultation and Services Agreement. Pursuant to the technical consultation and services agreement between Wuge and Tongrong WFOE dated January 3, 2020, Tongrong WFOE has the exclusive right to provide consultation services to Wuge relating to Wuge’s business, including but not limited to business consultation services, human resources development, and business development. Tongrong WFOE exclusively owns any intellectual property rights arising from the performance of this agreement. Tongrong WFOE has the right to determine the service fees based on Wuge’s actual operation on a quarterly basis. This agreement will be effective as long as Wuge exists. Tongrong WFOE may terminate this agreement at any time by giving a 30 days’ prior written notice to Wuge.
Equity Pledge Agreement. Under the equity pledge agreement among Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, Wuge Shareholders pledged all of their equity interests in Wuge to Tongrong WFOE to guarantee Wuge’s performance of relevant obligations and indebtedness under the technical consultation and services agreement. In addition, Wuge Shareholders will complete the registration of the equity pledge under the agreement with the competent local authority. If Wuge breaches its obligation under the technical consultation and services agreement, Tongrong WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. This pledge will remain effective until all the guaranteed obligations are performed or the Wuge Shareholders cease to be shareholders of Wuge.
Equity Option Agreement. Under the equity option agreement among Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, each of Wuge Shareholders irrevocably granted to Tongrong WFOE or its designee an option to purchase at any time, to the extent permitted under PRC law, all or a portion of his equity interests in Wuge. Also, Tongrong WFOE or its designee has the right to acquire any and all of its assets of Wuge. Without Tongrong WFOE’s prior written consent, Wuge’s shareholders cannot transfer their equity interests in Wuge and Wuge cannot transfer its assets. The acquisition price for the shares or assets will be the minimum amount of consideration permitted under the PRC law at the time of the exercise of the option. This pledge will remain effective until all options have been exercised.
Voting Rights Proxy and Financial Support Agreement. Under the voting rights proxy and financial support agreement among Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, each Wuge Shareholder irrevocably appointed Tongrong WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of his equity interests in Wuge, including but not limited to the power to vote on its behalf on all matters of Wuge requiring shareholder approval in accordance with the articles of association of Wuge. The proxy agreement is for a term of 20 years and can be extended by Tongrong WFOE unilaterally by prior written notice to the other parties.
On January 24, 2020, the Company completed the Acquisition and issued 4,000,000 shares of TMSR’s common stock to the Wuge Shareholders. The Shares were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Upon the closing of the Acquisition, the VIE agreements became effective.
Reorganization
General
On March 23, 2020, the Board of Directors and majority stockholders (the “Consenting Stockholders”) holding an aggregate of 15,491,952 shares of Common Stock issued and outstanding as of March 22, 2020 took action by written consent to approve the conversion of the Company from a Nevada corporation to a Cayman Islands exempted company (the “Conversion”).
2
On April 1, 2020, the Board and the Consenting Stockholders took action by written consent to approve an amendment to the Company’s Articles of Incorporation to change its corporate name to “Code Chain New Continent Limited” (the “Name Change”) and to change the ticker symbol of the Common Stock and warrants (the “Warrants”) to purchase one-half of one shares of Common Stock at a price of $2.88 per half share ($5.75 per whole share) to “CCNC” and “CCNCW”, respectively (the “Symbol Change”).
Following the completion of the Conversion, we are expected to qualify as a “foreign private issuer” under the rules and regulations of the SEC and we expect that the reduced reporting obligations associated with being a foreign private issuer will reduce operational, administrative, legal and accounting costs in the long term. We will remain subject to the mandates of the Sarbanes-Oxley Act, and, as long as our ordinary shares are listed on the NASDAQ, the governance and disclosure rules of that stock exchange. However, as a foreign private issuer, we will be exempt from certain rules under the Exchange Act that would otherwise apply if we were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. For example:
| ● | we will not be required to provide the same level of disclosure on certain issues, such as executive compensation; |
| ● | we will not be required to conduct advisory votes on executive compensation; |
| ● | we will be exempt from filing quarterly reports under the Exchange Act with the SEC; |
| ● | we will not be subject to the requirement to comply with Regulation FD, which imposes certain restrictions on the selected disclosure of material information; |
| ● | we will not be required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and |
| ● | we will not be required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction. |
We expect to take advantage of these exemptions if the Conversion is effected. Accordingly, after the completion of the Conversion, if you hold our securities, you may receive less information about the Company and our business than you currently receive with respect to the Company and be afforded less protection under the U.S. federal securities laws than you are entitled to currently. However, consistent with our policy of seeking input from, and engaging in discussions with, our stockholders, on executive compensation matters, we intend to provide disclosure relating to its executive compensation philosophy, policies and practices and conduct an advisory vote on executive compensation once every three years after the Conversion is effected. However, we expect to review this practice after the next such advisory vote and may at that time or in the future determine to conduct such advisory votes more frequently or to not conduct them at all.
Additionally, as a foreign private issuer, we will be permitted to follow corporate governance practices in accordance with Cayman Islands laws in lieu of certain NASDAQ corporate governance standards, such as the following NASDAQ corporate governance standards requiring that:
| ● | the majority of the board of directors be comprised of independent directors; |
| ● | executive compensation be determined by independent directors or a committee of independent directors; |
| ● | director nominees be selected, or recommended for selection by the board of directors, by independent directors or a committee of independent directors; |
| ● | an audit committee be comprised of at least three members, each of whom is an independent director and one of whom has finance and accounting experience; and |
| ● | all related party transactions be reviewed by the audit committee or another independent body of the board of directors. |
3
Harney Westwood & Riegels, our Cayman Islands counsel, has advised us that there are no comparable Cayman Islands laws related to the above corporate governance standards. Notwithstanding the foregoing, we do not intend to initially rely on any NASDAQ exemptions or accommodations for foreign private issuers following the Conversion.
We believe the Conversion and the related reorganization will enhance stockholder value. However, we cannot predict what impact, if any, the Conversion and reorganization will have in the long term in light of the fact that the achievement of our objectives depends on many things, including, among other things, future laws and regulations, as well as the development of our business.
The Conversion, the Name Change and Symbol Change are not effective as of the date of this report. For a discussion of the risk factors associated with the reorganization, please see the section entitled “Item 1A. Risk Factors—Risks Related to the Conversion.”
Effect of the reorganization
By virtue of the Conversion, all of the rights, privileges and powers of the Company, all property owned by the Company, all debts due to the Company and all other causes of action belonging to the Company immediately prior to the Conversion will remain vested in the Company following the Conversion. In addition, by virtue of the Conversion, all debts, liabilities and duties of the Company immediately prior to the Conversion will remain attached to the Company following the Conversion. The Company will remain as the same entity following the Conversion, and the Conversion will not effect any change in our business, management or operations or the location of our principal executive offices.
Upon effectiveness of the Conversion, all of our issued and outstanding shares of capital stock under Nevada laws will be automatically converted into issued and outstanding shares of share capital of under Cayman Islands laws, without any action on the part of our stockholders.
The Conversion will have no effect on the trading of our shares of capital stock. Upon the effectiveness of the Symbol Change, our ordinary shares are expected to continue listing on NASDAQ Capital market under the new symbol “CCNC”.
Upon effectiveness of the Conversion, our directors and officers will remain as directors and officers. We believe that the Conversion will not affect any of our material contracts with any third parties, and that our rights and obligations under such material contractual arrangements will continue as rights and obligations of the Company incorporated in Cayman Islands.
Procedure for Effecting the Conversion
To accomplish the Conversion, the Board has adopted a plan of conversion. The Plan of Conversion provides that we will convert into an exempted company limited by shares in Cayman Islands and will thereafter be subject to all of the provisions of the Companies Law.
Our common stock is currently listed on the Nasdaq Capital Market and our warrants are quoted on the OTC Pink. Pursuant to Rule 10b-17 of the Securities Exchange Act of 1934, the Conversion, the Name Change and the Symbol Change will require FINRA’s approval in order for it to be recognized for trading purposes. Furthermore, the Conversion, the Name Change and the Symbol Change will result in a change in the CUSIP numbers of our Common Stock (or ordinary share after the conversion) and Warrants. We will provide definitive information on our FINRA approval and new CUSIP numbers in a Current Report on Form 8-K to be filed with the Securities and Exchange Commission prior to the effective date of such Conversion, the Name Change and the Symbol Change. In addition, we are required to notify Nasdaq of the Conversion, the Name Change and the Symbol Change. Specifically, we are required to notify Nasdaq of the Symbol Change no later than two business days prior to the change, the Conversion as soon as practical after the change, and the Name Change no later than 10 calendar days after the change.
The Board will cause the Conversion to be effected as soon as practicable thereafter by filing with the Secretary of State of the State of Nevada articles of conversion (the “Articles of Conversion”) and applying to the Registrar of Companies in the Cayman Islands to be registered by way of continuation as an exempted company limited by shares under the Companies Law. In addition, the Company will adopt the Proposed Articles after the Conversion.
Notwithstanding the foregoing, the Conversion may be delayed by the Board or the Plan of Conversion may be terminated and abandoned by action of the Board at any time prior to the effective time of the Conversion, whether before or after approval by our stockholders, if the Board determines for any reason that such delay or termination would be in the best interests of the Company and our stockholders.
The Conversion will become effective upon the filing (and acceptance thereof by the Secretary of State of the State of Nevada and the Registrar of Companies of Cayman Islands, as applicable) of the Articles of Conversion and the date of registration specified in the certificate issued by the Registrar of Companies in the Cayman Islands confirming registration by way of continuation. The Name Change and Symbol Change will become effective upon will become effective upon the filing (and acceptance thereof by the Secretary of State of the State of Nevada and the Registrar of Companies of Cayman Islands, as applicable) of the Certificate of Amendment and approval by FINRA.
4
Coronavirus (COVID-19) Update
Recently, there is an ongoing outbreak of a novel strain of coronavirus (COVID-19) first identified in China and has since spread rapidly globally. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities globally for the past few months. In March 2020, the World Health Organization declared the COVID-19 as a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of our business operations and our workforce are concentrated in China, we believe there is a risk that our business, results of operations, and financial condition will be adversely affected, especially for our export related business. Potential impact to our results of operations will also depend on future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or mitigate its impact, almost all of which are beyond our control.
The impacts of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following:
| ● | We temporally closed our offices and production facilities to adhere to the policy beginning in February 2020, as required by relevant PRC regulatory authorities. Our offices are slowly reopening pursuant to local guidelines. |
| ● | Our customers could potentially be negatively impacted by the outbreak, which may reduce the demand of our products. As a result, our revenue and income may be negatively impacted in 2020. |
| ● | The situation may worsen if the COVID-19 outbreak continues. We will continue to closely monitor our collections throughout 2020. |
Because of the uncertainty surrounding the COVID-19 outbreak, the business disruption and the related financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time. For a detailed description of the risks associated with the novel coronavirus, see “Risk Factors—Risks Related to Our Business—Our business could be materially harmed by the ongoing coronavirus (COVID-19) pandemic.”
Corporate Structure
The following is an organizational chart setting forth our corporate structure as of the date of this Annual Report.
5
Industry Overview
Solid Waste Recycling Equipment Industry
According to The 2018 Annual Report On The Prevention And Control Of Environmental Pollution By Large And Medium-Sized Municipal Solid Waste published by the Ministry of Ecology And Environment of The People’s Republic of China in December 2018 , in 2017, approximately 1.31 billion tons of industrial solid waste and 40.101 million tons of Industrial hazardous waste were generated by large and medium-sized cities in the PRC; Meanwhile , according to the status from the Ministry of Industry and Information Technology of the PRC published on May 30, 2018, China’s accumulative storage of industrial solid waste exceeds 60 billion tons, covering an area of over 2 million hectares. In the PRC, industrial solid waste is generally handled by one of the following methods:
| ● | storage in special facilities or sites; |
| ● | disposal in landfills, incineration or related means; and |
| ● | recycling or comprehensive utilization, such as the process utilized by Shengrong, consisting of extracting or converting valuable raw materials from industrial solid waste; |
Storage is the most popular method in China which is widely used in all over the country. Approximately 95% of industrial solid waste in the PRC is stored in special facilities and sites, including warehouses for mining slags or tails.
However, the cost of storage, disposal and incineration of industrial solid wastes is high. It is estimated by the Ministry of Environmental Protection of China that during the next several years, the expense for environmental protection will increase by approximately RMB 200 billion annually, with total expenses for environmental protection from 2013 to 2023 expected to be RMB 1.7 trillion, twice the total expenses for environmental protection from 2002 to 2012. In additional, storage and disposal of industrial waste creates numerous challenges because significant land mass is required and disposal causes pollution to the environment.
Shengrong WFOE is addressing this significant unmet need by provide end users in these markets with a clean alternative to traditional waste disposal by significantly reducing of solid waste discharge into the environment and enables such users to extract value from valuable metals and other industrial waste materials.
Solid waste recycling equipment manufacturers typically situated in the upstream supply chain. In China, a broad of range of solid waste processing and recycling equipment hit the market in recent years including solid waste pretreatment equipment, hazardous waste recycling equipment and solid waste incinerators.
Although solid waste recycling equipment industry has an excellent growth potential, it is still a small-scale industry with few full-fledged players. Solid waste recycling and utilization, unlike many western countries, is a relatively new concept in China. As a result, most solid waste recycling equipment manufacturers are currently in their development stage with rudimentary production capabilities. We believe few of them has the capacity to produce a full set of solid waste recycling equipment covering all the industrial needs. These manufacturers are small and medium enterprises plagued by lack of technical support and creativity. Some equipment, such as landfill leachate treatment equipment, large-scale incineration plant, and online environmental monitoring system must be imported almost exclusively from other countries. Because of their lack of research and development capabilities, most solid waste recycling equipment manufacturers have to engage in joint venture with foreign companies. For example, more than 80% of Chinese incineration plant manufacturers have no choice but to partner with foreign companies in order to manufacture their products. Given that these solid waste recycling equipment manufacturers are low-end manufacturers, they frequently operate at lower profit margin than those in the western countries.
As more mandatory energy conservation and emission reduction target-setting policies on the horizon, we believe there will be an increasing demand for high-quality and technologically-advanced solid waste recycling equipment in China, and competition in the solid waste recycling equipment industry will continue to intensify. Solid waste recycling equipment sales will compete not only on price, but also on quality, technology, service and brand.
6
Chinese Coating Trading Market
According to the preliminary statistics of the bureau of statistics, in 2017, the annual output of 1,380 industrial enterprises above designated size in the coating industry reached 20.364,000 tons, up 12.38% year on year, exceeding the expected output. The main business income of 2,057 industrial enterprises above designated size reached 417.289 billion yuan, up 5.0% year on year. The total output of coatings industry, the main business revenue growth since 2016, continued to grow, in the case of a part of the upstream raw material prices continue to rise still maintained a good growth relative to the chemical industry, in “much starker choices-and graver consequences-in” period, the decisive phase of the well-off society, all kinds of engineering, manufacturing is still a huge demand for coating, will be a period of time in the future continue to maintain high growth.
The main products of Wuhan Host are anticorrosive coatings and water-based anticorrosive coatings. Heavy anticorrosive coating has excellent acid resistance, corrosion resistance, moisture and heat resistance, at the same time, high solid content, low volatile organic, environmentally friendly; the water-based coating has the advantages of good salt spray resistance, good fullness and glossiness, excellent decorative properties, safety, health and environmental protection. Accord with the development direction of Chinese coating.
Chinese Coal Trading Market
Global coal is still the main energy source. According to the International Energy Agency’s Global Coal Market Report (2018-2103) on February 25, 2019, global demand for coal will remain stable in the next five years. China will remain the world’s biggest consumer of coal. In particular, the clean and efficient development of China's coal industry, as well as the strengthening of nitrogen oxides, sulfur dioxide and soot emission control, has made coal once again a very attractive energy source. In addition, due to its affordable price, abundant reserves and convenient transportation, coal remains the main energy source in many other countries besides China. Therefore, the coal market in China remains strong.
Our Products and Services
| 1. | Shengrong WFOE |
Shengrong WFOE sells the following five types of products as well as technology support services for the customers:
Secondary Tailings Comprehensive Utilization System
The secondary tailings comprehensive utilization system is designed for the second stage of recycling of mining tailings, including secondary ilmenite tailings and low grade silicon ore, following the first stage of removing heavy metals containing silicon, calcium, aluminum, magnesium tailings elements. Each individual system is customized to meet the needs of the end user, based on the physical and chemical characteristics of the secondary tailings, the processing power involved, the positioning of the final product and other factors. The system recycles the secondary tailings into new construction and wall materials.
Non-metallic Mineral Impurity Purification System
The non-metallic mineral impurity purification system is an integrated system with efficient permanent magnet sorting equipment used for non-metallic mineral impurity removal or significant reduction of non-metallic mineral content of heavy metals. This system improves the quality of products and expands the scope of the application of products. The system can be used to recycle a variety of non-metallic mineral, including silicon ore, micro silica, high-phosphorus soil and other minerals. Each individual system is customized to meet the needs of the end user, based on the processing power involved, the mineral resource properties and other factors.
Refractory Low-Grade Ore Comprehensive Recovery System
The refractory low-grade ore comprehensive recovery system is integrated with efficient permanent magnet sorting equipment. This system uses low-grade refractory processes to physically separate the metal ore components, thereby achieving comprehensive utilization of mineral resources and reduce the amount of ore. This process generates significant savings in the cost of production of mineral recovery and can be used for a variety of low-grade hematite, limonite, native rutile ore and other refractory comprehensive sorting recycling metal ores. Each individual system is customized to meet the needs of the end user, based on the processing power involved, the mineral resource properties and other factors.
7
Permanent Tailings Sorting and Recycling System
The permanent tailings sorting and recycling system is designed for the first stage of recycling of mining tailings. The system recovers valuable metals from various mining tailings, including but not limited to manganese tailings, copper tailings, red mud and other aluminum dross tailings. Each individual system is customized to meet the needs of the end user, based on the physical and chemical characteristics of the secondary tailings, the processing power involved, the positioning of the final product and other factors.
Industrial solid waste recycling sorting system
The industrial solid waste recycling sorting system involves integrated sorting for industrial solid waste, including but not limited to petrochemicals, iron, steel and nonferrous metals, generating valuable recycled resources and reducing solid waste emissions. Each individual system is customized to meet the needs of the end user, based on the solid waste treatment capacity and other factors.
On-Site training service
For each type of system Shengrong WFOE sells, Shengrong WFOE also provided on-site training service to its customers due to the complex nature of its products. Failure to operate these systems properly could significantly hinder their effectiveness. As a result, this on-site training service serves as a necessary support to Shengrong WFOE’s customers and help them lower the maintenance cost.
| 2. | Wuhan Host |
Wuhan Host produces and sells its own anti-corrosion and anti-corrosion coatings, which are applicable to the surface anti-corrosion, waterproof and decoration of concrete and steel components. They are widely used in the fields of ships, Bridges, water conservancy and hydropower projects, wind power generation, mining machinery manufacturing, petroleum, petrochemical and metallurgy, port construction, light industry, locomotive and vehicle, etc. Below is its main products and its respect usage:
| Products | Usage | |
| Water-borne epoxy anti-rust paint | Corrosion protection on steel surface | |
| Epoxy zinc rich primer | Used as basic anticorrosive primer for steel structure and equipment surface in mining, derrick, shipbuilding, port and wharf, steel structure, bridge, iron tower, petroleum pipeline, chemical industry, metallurgy and other industries. It can also be used as a primer for maintenance and as an anticorrosive primer on galvanized sheet surfaces | |
| Solvent-free epoxy bituminous anticorrosive paint | Used for bottom, water ballast tank, wharf steel column, offshore oil drilling platform, hydraulic steel gate, mine steel support, buried pipes, municipal construction of water diversion water pipe, gas cabinets, industrial loop water system, industrial wastewater treatment, metal anti-corrosion, heat pipe protection layer of waterproof anti-corrosion and other corrosion environment, including steel and wood products, cement products and components for long-term anti-corrosion waterproof | |
| Permeable epoxy polysiloxane anticorrosive and waterproof material |
Used for waterproofing of concrete walls, basements, toilets and baths of new and old buildings for industry and civil use;
Concrete protection, repair of seepage and anti-seepage of urban roads and Bridges, anti-collision walls, sidewalks in parks, workshops, floors, underground garages, swimming pools, sports fields, tunnels, airports, DAMS and seaports | |
| Cold spraying zinc | Excellent cathodic protection and shielding for steel.It is easy to apply, and can be sprayed, brushed or rolled. It is the best material to replace traditional hot dip zinc, hot dip galvanizing and hot spray zinc (aluminum).It is applicable to ship, steel bridge, steel roof frame, steel grid frame, power facilities, pipelines, storage tanks and other heavy anti-corrosion fields |
8
| 3. | Jiangsu Ronghai |
Jiangsu Ronghai was established in 2009. For the last ten years, Jiangsu Ronghai maintained its marketing position by cultivating an experienced management team equipped with industrial know-how and well-rounded coal sales team. As a veteran in the Chinese coal trading industry, Jiangsu Ronghai has a sales team with lengthy experience in coal trading, deep understanding of the market, coal products tailored to its customers’ demand. Currently, Jiangsu Ronghai mainly focuses on the sales, storage, transportation, and processing of steam coal. Because of its proximity to Rugao Port, a port known for its busy coal trade, Jiangsu Ronghai is able to keep its transportation cost low and allocate its capital to develop a strong coal processing capacity with processing equipment and professional personnel. The principal product of Jiangsu Ronghai is steam coal. In the second half of 2019, Jiangsu Ronghai expects to expand its business into iron ore trading and refined processing, as well as refined coal and coking coal business.
Jiangsu Ronghai has a reliable channel of procuring steam coal, large warehouse space for storage, and loyal customers. One of its major customers is Nantong Linan Industrial Trading Co., ltd., a local manufacturing heavyweight. Since its inception, Jiangsu Ronghai has accumulated a growing reputation in the coal industry. In 2016, Jiangsu Ronghai was awarded “Nantong City most reputable company in the coal industry” by Nantong Coal Industry Association.
| 4. | Wuge |
Wuge was established in 2019 and is still in this early developing stage. Wuge Manor, the game Wuge is developing, is the world’s first game that combines Internet of Things (IoT) and e-commerce that is based on Code Chain platform. It is based on real cities and uses the IoT Grid as the access point to access e-commerce by Code Chain. Through the game, players can have access to hundreds of vendors and business owners in over 100 cities in China, participate in activities those businesses set up and collect points, which can be redeemed as equipment in the game or coupons usable when making purchase at that business. Code Chain access to e-commerce includes Online to Offline (O2O) “scanning QR Code” and social media that seamlessly link offline and online and connect real and virtual directly, so that each IoT Grid becomes an e-commerce access to realize the decentralization of e-commerce access and complete the basic layout for blockchain e-commerce.
In addition, Wuge produced electronic tokens that combine the five-W elements (when, where, who, why, what), geographic location via the Beidou satellite system and identity information using Code Chain technology. The electronic tokens are unique, tradable, and inheritable digital assets and cannot be tampered. The electronic tokens are based on and stored in the Code Chain system and can be used to purchase virtual property based on real estate.
Our Customers
| 1. | Shengrong WFOE’s Customers |
Currently Shengrong WFOE sells all of its products domestically in China. Depending on the nature of the product and the utilization of the product Shengrong WFOE sells its products to end users or distributors. Shengrong’s end users are primarily in the mining, metal and clean technology industries.
Shengrong WFOE has a diverse end user base to sell our products to end users. Since September 2018, Shengrong WFOE has entered into multiple equipment purchase contracts with serval customers pursuant to which Shengrong WFOE will provide different types of products and technology support service to our customers.
Shengrong WFOE believes that the loss of any of our customers, or a material change in our relationship with any such customer, would materially impact our business and results of operations. To mitigate such risk and continue to develop our business, Shengrong WFOE has been actively seeking new customers and has been able to generate equipment sales revenue through such efforts. In addition, Shengrong WFOE has been continuously expanding its technology service business segment. Shengrong WFOE is actively looking to expand its business for more distributors and customers and technology supproting services tangential to the sale of Shengrong WFOE’s products.
9
| 2. | Wuhan HOST’s customers |
Wuhan HOST produces and sells anti-corrosion waterproof coating materials, applicable to the concrete and the surface of the steel constructions. Its products are widely used in ships, bridges, water reservoir, wind power generation station, mining machinery, ports, construction vehicles, and many other fields. Wuhan Host’s major customers are Shanghai menplai new material Co., Ltd., China railway bridge bureau No. 7 Engineering Co., Ltd., and Beijing Niuweixun Engineering Technology Co., Ltd.,
| 3. | Jiangsu Ronghai’s customers |
As of December 31, 2019, 34% of the coal Jiangsu Ronghai procured and processed were sold directly to Nantong Linan Industry and Commerce Co., Ltd. for its production of acetate fiber plant.
| 4. | Wuge |
Wuge is still in this early developing stage and has not cultivated a stable group of customers. The main source of revenue is membership fees from sales and marketing representatives.
Our Suppliers
| 1. | Shengrong WFOE’s supplier |
Shengrong WFOE have three main suppliers, i.e. Hubei Shengrong, Wuhan Yinggema Technology Development Co., Ltd. and Wuhan Taiyinghe Technology Development Co., Ltd.
| 2. | Wuhan Host’s suppliers |
Wuhan Host’s main suppliers are Xiamen Zhonghe Shangmao Co., Ltd., EverZinc(Hunan) Co., Ltd., Foshan Lanyang Environmental Protection Material Co., Ltd. and Hubei Yinhe Pot Co., Ltd..
| 3. | Jiangsu Ronghai’s suppliers |
Jiangsu Ronghai’s top five suppliers are Shanghai Liye Supply Chain Management Co., Ltd., Jiangsu Shengquan Mining Co., Ltd., Zhejiang Zhenheng Energy Co., Ltd., Zhejiang Shiyue Energy Co., Ltd., and Xuzhou Shenzhan Trading Co., Ltd.
| 4. | Wuge |
Wuge relies on one supplier during the fiscal year ended December 31, 2020, Xi’an QIkeli Information Technology Co., Ltd.
Production
Shengrong WFOE
Shengrong WFOE currently is to sell waste recycling equipment and systems.
Wuhan Host
Coating production process can be divided into six phases: feeding, dispersion, grinding, paint, filtering, and packaging.
Feeding - according to the different types of coating, the corresponding film-forming materials, solvents, fillers, additives will be added into dispersion kettle in accordance with certain proportion and sequence.
Dispersion - in order to make the particles such as pigment and filler evenly and fully mixed into the paint slurry, the dispersion kettle is used to stir and disperse the paint slurry.
10
Grinding – to transfer the mixed paint slurry through the pipe to the grinding machine for grinding and keep grinding the mixed paint slurry to required fineness.
Paint adjustment – to add the evenly stirred paint into the paint adjustment tank and adjust the paint to the required viscosity and color.
Filter - to put the color adjusted paint through filtering machine to become coatings
Packaging -- the filtered coatings are directly loaded into metal drums in different specifications through the packaging machine and transported to the warehouse for airtight storage.
Jiangsu Ronghai
Jiangsu Ronghai uses two tiers membrane filtering system to screen the coal of different specifications, and mix different types of raw coals to produce final coal products. Through our high tech machinery, we manipulate the level of sulfur content, water content, ash content, and other different properties of coal in order to meet our customers’ requirements.
Research and Development and Our Technology
Hubei Shengrong, is a pioneer in China for manufacturing zero-emission manganese tailings recycling equipment. This achievement was made possible through Hubei Shengrong’s own technology known as high efficiency permanent magnet machine and comprehensive utilization technology for selecting weak magnetic micro-particle mineral industrial waste residue. When Shengrong WFOE sold Hubei Shengrong to Hopeway in December 2018 pursuant to the EPA, Hubei Shengrong assigned all the intellectual property rights including the “Shengrong” trademark, patent, know-how etc. incident to the Shengrong WFOE’s business to Shengrong WFOE.
The “Shengrong” brand has been gaining traction in the PRC mining and industrial recycling industry since it began selling its products on a large scale in 2016 by introducing innovative solutions to the mining and industrial sector in the PRC. Shengrong WFOE’s research and development team currently consists of seven members as of April 17, 2020, including two members of our senior management team that are recognized as industry experts in China. Shengrong WFOE’s engineering team works closely with Shengrong WFOE’s customers and distributors in order to understand the requirements of the end users of Shengrong WFOE’s products, and develop products that are tailored to the needs of such end users. Shengrong WFOE offers proprietary “green” technology to enable end users to save operating cost in the removal of solid mining and industrial wastes. In addition, products sold by Shengrong WFOE also allows end users to collect certain usable resources like metal residues during the recycling process.
Our in-house technology was listed on the “catalogue for advanced applicable technical on comprehensive utilization of mineral resource” issued by Ministry of Land and Resource of the People’s Republic of China in October 2014. We are also a pioneer in Titanium dioxide pigment black tailings acid hydrolysis separating and recycling system using waste catalyst magnetic separating system in Chinese titanium dioxide pigment production industry, which has the capacity to occupy more than 95% of catalytic cracking unit Chinese market share. According to the Scientific Technology Novelty Retrieval Report (“STNRR”) provided by Hubei Academy of Science and Technical Information in April 2016, Our in-house technology for the recovery of the ilmenite concentrate from Titanium Dioxide acid hydrolysis slag using the axial sorting method for inner surface of permanent magnetic cylinder was confirmed to be novel in the world. STNRR is widely considered as a technical document provided by a Chinese science and technology academy to appraise the novelty of a technology in the world. We also maintained a leading position in the development of microsilica ultrapure extracting technology, primary rutile separation and purification technology. Management believes that our unique technology is superior to other recycling systems available in the PRC and global markets because the high efficiency permanent magnetic separating and comprehensive utilization system is a pure physical process. Pure physical process can prevent the creation of secondary pollution and save energy. The management also believes we have more experience in market application and technology implementation than its peers.
11
Wuhan Host focus on research and development, heavy-duty coating not only trained 8 core team, bought drying apparatus, abrasion tester, chromatograph, such as a number of experimental apparatus, has also established a set of more scientific research and development system, pay attention to independent research and development in at the same time, through the cooperation development and the introduction of digestion, strengthen the advantage of a company in the industry, weakening the dependence of the company to research and development personnel, to ensure the continuity of research and development of products of the company.
Wuge has a strong technology development team, consisted of 26 experienced members, that focused on research, improvement and maintenance the existing and developing games and Code Chain technology.
Intellectual Property
Shengrong WFOE relies on a combination of patents, trademarks, domain names and confidentiality agreements to protect our intellectual property. Our R&D processes are based on technology developed primarily in-house by engineering personnel.
With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on, among other things, trade secret protection and confidentiality agreements to safeguard our interests. All of our research and development personnel have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our associates to assign to us all of the inventions, designs and technologies they develop during the course of employment with us. We are not aware of any material infringement of our intellectual property rights.
Patents
As of April 17, 2020, Shengrong WFOE has one utility model patents registered with the State Intellectual Property Office of the PRC, and two patents registered with the United States Patent and Trademark Office.
The following table provides the name, patent number, type of patents, issuance date, validity term, and expiration date of each of Shengrong WFOE’s registered patents.
| Certificate No. | Patent content | Type | Patent No. |
Application Date (mm-dd-yy) |
Issuance Date (mm-dd-yy) |
Term | ||||||||
| 7017018 | Mobile magnetic separation system | utility model | ZL2017 2 1183838.4 | 09/14/2017 | 02/23/2018 | 10 years | ||||||||
| US008746457B2 | Method and Device for Axial Separation by The Inner Surface of a Permanent Megnetic arched groove | N/A | US8,746, 457 B2 |
03/30/2010 | 06/10/2014 | June 10, 2014 to October 30, 2030, subject to any patent term adjustments or terminal disclaimers | ||||||||
| US008746458B2 | Axial Sporting Method and Device with Permanent-Magnet Drum Eccentric Inner Surface | N/A | US8,746, 458 B2 |
03/30/2010 | 06/10/2014 | June 10, 2014 to October 30, 2030, subject to any patent term adjustments or terminal disclaimers | ||||||||
12
Shengrong WFOE is also in the process of applying an invent patent for a mobile magnetic separation system with the National Intellectual Property Administration of the PRC, which is expected to complete the patent registration by the end of this year.
As of April 17, 2020, Wuhan Host has seven invention patents registered with the State Intellectual Property Office of the PRC.
The following table provides the name, patent number, type of patents, issuance date, validity term, and expiration date of each of Wuhan HOST’s registered patents.
| Certificate No. | Patent content | Type | Patent No. |
Application Date (dd-mm-yy) |
Issuance Date (dd-mm-yy) |
Term | ||||||
| 2931521 | The invention relates to a waterborne UV silicone polyurethane anticorrosive coating and a preparation method thereof | invention | ZL2016 1 0235536.0 | 15/04/2016 | 02/23/2018 | 20 years | ||||||
| 2927001 | The invention relates to a epoxy polysiloxane coating and its preparation method | invention | ZL2016 1 0312732.3 | 12/05/2016 | 22/05/2018 | 20 years | ||||||
| 2803467 | The invention relates to a solvent-free self-leveling paint modified by renewable vegetable oil and its preparation method | invention | ZL2016 1 0235413.7 | 15/04/2016 | 18/05/2018 | 20 years | ||||||
| 2788781 | The invention relates to an aqueous coating containing waste mineral residue and its preparation method | invention | ZL2016 1 0235415.6 | 15/04/2016 | 02/02/2018 | 20 years | ||||||
| 2825260 | The invention relates to a preparation method of acrylic polysiloxane aqueous emulsion | invention | ZL2016 1 0235178.3 | 15/04/2016 | 23/01/2018 | 20 years | ||||||
| 2955098 | The invention relates to a bisphenol-type fluorinated glycidyl ether, its preparation method and the application | invention | ZL2016 1 0235619.X | 15/04/2016 | 23/02/2018 | 20 years | ||||||
| 3213537 | The invention relates to a water - based polysiloxane resin and its preparation method | invention | ZL2016 1 0315742.2 | 12/05/2016 | 08/06/2018 | 20 years |
13
Trademarks
As of April 17, 2020, Shengrong WFOE has been granted four trademarks, which are currently registered in China.
| Certificate No. | Trademark | Approved goods | ||
| 6576227 |  |
category 7: washer, slag screen (machine), ore sand processor, flotation machine, magnetic separator, ore washer, ore contamination precipitation, mine select machine, waste treatment equipment, and waste treatment machine (machine). | ||
| 6617166 |  |
category 6: undressed or half-processed cast iron, ferrotitanium, manganese powder, ferrosilicon, packaging and tinsel for packaging, metal in powder form, zinc powder, sheet metal and plate metals, pig iron or half forging iron, and undressed or half-processed common metal. | ||
| 5566978 |  |
category 19: furnace ballast (building materials); Luminous panel; stone binder; stone, concrete or marble works of art; non-metallic monuments; The slate. | ||
| 5566977 |  |
category 19: gypsum; gypsum board; furnace ballast (building materials); refractory materials; luminous panel; stone binder; stone, concrete or marble works of art; non-metallic commemorative plaque; the slate. |
As of April 17, 2020, Wuhan Institute of Modern Industrial Technology licensed Wuhan Host the following trademark, which is currently registered in China.
| Certificate No. | Trademark | Approved goods | ||
| 6163589 |  |
category 2: the paint; vehicle chassis coating; paint thinner; coating (paint); fire retardant paint; primer; waterproof powder (coating);metal anti-rust preparation; preservatives. |
Copyrights
As of April 17, 2020, Wuge has been granted one copyright, which is currently registered in China.
| Certificate No. | Name | Type | Registration No. |
Application Date (dd-mm-yy) |
Issuance Date (dd-mm-yy) | |||||
| 4610189 | Wuhe Mansion Game Software V1.0 | invention | 2019SR1189432 | 05/10/2019 | 22/11/2019 |
Competition
Competition for Shengrong WFOE’s business
To date, the Shengrong WFOE sales have been exclusively to customers and end users located in the PRC, and as a result, our competitors are PRC domestic companies. We believe that there a number of competitive factors within our industry, including the following:
| ● | Pricing. Flexibility to control pricing of products and the future ability to use economies of scale to secure competitive pricing advantages; |
| ● | Technology. Self-owned patents making us have ability to provide end users with systems that efficiently dispose of solid wastes, using a limited amount of energy consumption and operating costs; and |
| ● | Barriers to entry. Technical knowledge, industry reputation, local market knowledgeand established relationships with suppliers and distributors and end users to support the development and sale of commercially viable systems. |
Competition among Fluid Catalytic Cracking (‘FCC”) system providers in China can be characterized as niche market. Our primary competitor for these systems is Qingdao Huicheng Environmental Protection Technology Co., Ltd. We believe that our systems are superior for various reasons, including the fact that our proprietary processing does not result in the high cost re-disposal of waste water and waste acid involved in the use of chemical methods used by our competitor.
14
Competition among providers of low grade hematite separation systems in China can be characterized as niche market. Our primary competitors for these systems are Ganzhou Jinhuan Magnetic Separation Equipment Co., Ltd., which is a supplier, producer, manufacturer of high gradient magnetic separators (HGMS) and wet high intensity magnetic separators (WHIMS). It designs, develops, manufactures and markets magnetic separation equipment for beneficiating weakly magnetic minerals, and for purifying non-metallic minerals.), Shenyang Longji Electromagnetic Science and Technology Co., Ltd., which is a supplier of steam condensed water iron removing filter, condensed water iron removing filter, high temperature condensed water iron removing filter), Yueyang Dalishen Electromagnetic Mechanical and Electrical Co., Ltd. and Guangzhou Nonferrous Metals Research Institute. Shengrong WFOE believes it competes favorably with them because it has a series of self-owned unique patents in China which have already been utilized in the production of the environmental protection equipment. Some of Shengrong WFOE’s patents were also registered in the U.S. We believe that our technology is superior because our proprietary processing method does not result in the high cost electromagnetic high gradient magnetic separation process with hematite involved in the use of chemical methods used by our competitor.
Based on collective extensive experience in the industry, Shengrong WOFE management believes that it is one of the leading enterprises in China in the design and sale of solid waste recycling systems for the mining and industrial sectors in the PRC. However, there can be no assurance that our initial competitive advantage will be retained and that one or more competitors will not develop systems that are equal or superior to ours or are better priced than our systems.
Competition for Wuhan Host’s business
According to the preliminary statistics of the Bureau of Statistics, in 2017, the annual output of 1,380 industrial enterprises above designated size in the coating industry reached 20.364,000 tons, a 12.38% year on year increase, exceeding the expected output. The main business income of 2,057 industrial enterprises above designated size reached 417.289 billion yuan, up 5.0% year on year. The total output of coatings industry, the main business revenue growth since 2016, continued to grow, in the case of a part of the upstream raw material prices continue to rise still maintained a good growth relative to the chemical industry, in “much starker choices-and graver consequences-in” period, the decisive phase of the well-off society, all kinds of engineering, manufacturing is still a huge demand for coating, will be a period of time in the future continue to maintain high growth.
After 2016, the pressure of environmental protection has increased but not decreased. The severe pressure of environmental protection has led to the upgrading of products, industries and production lines, and the overall cost has increased rapidly within a short time. Although the environmental protection pressure high strength in recent one or two years to paint coating enterprise caused a certain economic loss, but overall, these losses are worth it, is also must, under high pressure, forcing coating, coating enterprise seek survival, prompting investment environment friendly coatings products and coating technology and equipment research and development, is advantageous to the industry to develop in the direction of high-end in green.
According to the ecological civilization construction and green development road map formulated at the 19th CPC national congress, the requirements of green development will certainly promote coating enterprises to accelerate the pace of product transformation to green and environment-friendly direction. The transformation process will bring new development space and opportunities to enterprises, and China’s coating industry will usher in a new development period.
Wuhan HOST always focus on the coating industry, new materials technology accumulation, product innovation, industrial chain synergy and brand core competitive advantages, such as with the client’s leading enterprises, brand enterprises established long-term stable cooperative relations, no matter from the enterprise scale and comprehensive strength, the company is still in the domestic industry leader.
Wuhan HOST adheres to market-oriented, based on the main industry, vigorously innovate, improve the level of research and development, and share new technology with customers to bring market appreciation. It has not only trained the company’s own scientific research team, but also established a set of scientific research and development system. While focusing on independent research and development, it has enhanced the company’s advantages in the industry through cooperative development and introduction and digestion.
Competition for Jiangsu Ronghai
The local competition is fierce. Our principal competitor is Nantong Huagang Materials Trading Co., Ltd. However, as we have strengths in processing, transportation and reputation, we have been maintaining a favorable position against our competitor and earn loyalty from our largest customer.
Competition for Wuge
Code Chain technology and electronic token are at a developing stage in China. There is currently no established competitor in the market in China.
15
Environmental Matters
The Environmental Protection Law, promulgated by the National People’s Congress on December 26, 1989, is the primary law for environmental protection in China. The law establishes basic principles for coordinated advancement of economic growth, social progress and environmental protection, and defines the rights and duties of governments at all levels. Local environmental protection bureaus may set stricter local standards than the national standards and enterprises are required to comply with the stricter of the two sets of standards. Due to the nature of our business, we may produce certain amounts of waste water and solid waste materials during the course of our production. We believe that we are in compliance in all material respects with applicable PRC laws and regulations. All of our products in all material respects meet the relevant environmental requirements under PRC laws and during the three years ended December 31, 2019, 2018 and 2017, we were not subject to any fines or legal action involving non-compliance with any relevant environmental regulation, nor are we aware of any threatened or pending action, including by any environmental regulatory authority.
Wuhan Host received Letter of Acceptance Opinions on Environmental Protection for The Completion of The 4000t/a New Industrial Coating Material Production Project of Wuhan Host Coating Material Co., LTD., issued by the Administrative Examination and Approval Bureau of E Zhou Gedian Economic and Technological Development Zone on June 27, 2017.As of December 31, 2019, Wuhan Host was not subject to any fines or legal action involving non-compliance with any relevant environmental regulation, nor are we aware of any threatened or pending action, including by any environmental regulatory authority.
As of December 31, 2019, Jiangsu Ronghai was not subject to any fines or legal action involving non-compliance with any relevant environmental regulation, nor are we aware of any threatened or pending action, including by any environmental regulatory authority.
Governmental Regulations
Business license
Any company that conducts business in the PRC must have a business license that covers a particular type of work. Our business license covers our present business of manufacturing, sale and lease of environment protection equipment, development of environment protection technologies and related technology and consulting services. Prior to expanding our business beyond that of our business license, we are required to apply and receive approval from the PRC government.
Employment laws
We are subject to laws and regulations governing our relationship with our employees, including: wage and hour requirements, working and safety conditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations, which may require substantial resources for compliance. China’s National Labor Law, which became effective on January 1, 1995, and amended on August 27, 2009, and China’s National Labor Contract Law, which became effective on January 1, 2008, and amended on December 28, 2012, permit workers in both state and private enterprises in China to bargain collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives in the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract.
Intellectual property protection in China
Patent. The PRC has domestic laws for the protection of copyrights, patents, trademarks and trade secrets. The PRC is also signatory to some of the world’s major intellectual property conventions, including:
| ● | Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980); |
| ● | Paris Convention for the Protection of Industrial Property (March 19, 1985); |
| ● | Patent Cooperation Treaty (January 1, 1994); and |
| ● | The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001). |
Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 1993, 2001 and 2009, respectively.
16
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents — patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file, which means that a patent may be granted only to the person who first files an application. Consistent with international practice, the PRC allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability only. For a design to be patentable it cannot be identical with, or similar to, any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.
Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked. The duration of a trademark is 10 years from the date of registration.
Domain names. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.
Regulations on Tax
PRC Corporate Income Tax
The PRC corporate income tax, or CIT, is calculated based on the taxable income determined under the applicable CIT Law and its implementation rules, which became effective on January 1, 2008 and amended on February 24, 2017. The CIT Law imposes a uniform corporate income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises.
Uncertainties exist with respect to how the CIT Law applies to the tax residence status of The Company and our offshore subsidiaries. Under the CIT 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 corporate income tax purposes. Although the implementation rules of the CIT 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, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although the Company does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in Circular 82 to evaluate the tax residence status of The Company and our subsidiaries organized outside the PRC.
According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC corporate income tax on its worldwide income only if all of the following criteria are met:
| ● | the primary location of the day-to-day operational management is in the PRC; |
17
| ● | decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; |
| ● | the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained in the PRC; and |
| ● | 50% or more of voting board members or senior executives habitually reside in the PRC. |
We do not believe that we meet any of the conditions outlined in the immediately preceding paragraph.
We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that we or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then we or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our ordinary shares.
Value-Added Tax and Business Tax
In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In May and December 2013 and April 2014, the Ministry of Finance and the State Administration of Taxation promulgated Circular 37, Circular 106 and Circular 43 to further expand the scope of services which are to be subject to Value-Added Tax, or VAT, instead of business tax. Pursuant to these tax rules, from August 1, 2013, VAT will be imposed to replace the business tax in certain service industries, including technology services and advertising services, on a nationwide basis. The VAT rate shall be 17% for sale or importation of goods by a taxpayer. But, unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided.
Regulations Relating to Foreign Exchange and Dividend Distribution
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
18
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals of SAFE and other PRC government authorities as necessary.
SAFE Circular 37
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation. However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular 37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Share Option Rules
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers. We will make efforts to comply with these requirements upon completion of our initial public offering.
19
Regulation of Dividend Distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Legal Proceedings
From time to time, we may be involved in various claims and legal proceedings arising in the ordinary course of business. None of our operating subsidiaries or variable interest entities is currently a party to any such claims or proceedings which, if decided adversely to the Company, would either, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations or cash flows.
Employees
As of April 17, 2020, Shengrong WFOE, Wuhan Host, Jiangsu Ronghai had 30, 45, 12 and 56, respectively, full-time employees.
We have not experienced any significant labor disputes and consider our relationship with our employees to be good. Our employees are not covered by any collective bargaining agreement.
We have established an employee welfare plan in accordance with the relevant PRC laws and regulations. Our total expenses for this plan were approximately $55,737 and $19,566 in 2019 and 2018, respectively.
As we continue to expand our business, we believe it is critical to hire and retain top talent, especially in the areas of marketing and technology engineering. We believe we have the ability to attract and retain high quality engineering talent in China based on our competitive salaries, annual performance-based bonus system, and equity incentive program for senior employees and executives. In addition, we have a training program for entry-level engineers that allows them to work closely with an experienced mentor to gain valuable hands-on experience and provide other professional development opportunities, including seminars where experienced engineers give lectures on specific engineering topics and new methods that can be applied to various projects.
20
An investment in our shares of common stock involves a high degree of risk. You should carefully consider the following risk factors, together with the other information contained in this prospectus, before you decide to buy any shares. Any of the following risks could cause our business, results of operations and financial condition to suffer materially, causing the market price of our shares of common stock to decline, in which event you may lose part or all of your investment in our shares of common stock. Additional risks and uncertainties not currently known to us or that we currently do not deem material may also become important factors that may materially and adversely affect our business.
Risks Related to Our Business and Operations
Our revenues are highly dependent on a small number of customers, and we will likely continue to be dependent on a small number of customers.
Three of Company’s customers accounted for 35.3%, 23.7% and 14.4%, respectively, of our total revenues for the year ended December 31, 2019. We are, and will likely continue to be, dependent on a small number of customers, and the loss of any such customer would materially and adversely affect our business, operating results and financial condition. Furthermore, as a result of our reliance on a limited number of customers, we could face pricing and other competitive pressures which may have a material adverse effect on our business, operating results and financial condition.
A significant part of Jiangsu Ronghai’s revenues is also derived from a small number of customers. Jiangsu Ronghai expects a small number of customers will continue to generate a substantial portion of our revenues for the foreseeable future. As of December 31, 2019, Nantong Linan Industrial Trading Co. Ltd. and Huainan Guoqi Trading Co. Ltd. accounts for 59% of the company’s total sales. The loss of Nantong Linan and Huainan Guoqi, or the change of the contractual terms of the contract entered between Jiangsu Ronghai and Nantong Linan and Huainan Guoqi or any significant dispute with Nantong Linan and Huainan Guoqi could materially adversely affect its financial condition and its results of operations.
If one or more of Jiangsu Ronghai’s customers does not perform under one or more contracts with it and Jiangsu Ronghai is not able to find a replacement contract, or if a customer exercises certain rights to terminate the contract, Jiangsu Ronghai could suffer a loss of revenues that could materially adversely affect its business, financial condition and results of operations.
Our operating subsidiaries, Shengrong WFOE, Wuhan Host, Jiangsu Ronghai and Wuge all have limited operating histories, which make it difficult to evaluate their businesses and prospects.
Shengrong WFOE commenced operations in March 2016 and has a limited operating history. Prior to the year end of 2018, the Company had limited operations and was focused primarily on research and development.
We may not be able to achieve similar results or grow at the same rate as Hubei Shengrong has in the past. It is also difficult to our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in new and rapidly evolving markets such as the industrial and mining recycling industry may be exposed. We will continue to encounter risks and difficulties that companies at a similar stage of development frequently experience, including the potential failure to:
| ● | obtain sufficient working capital and increase its registered capital to support expansion of our industrial and mining recycling business; |
21
| ● | comply with any changes in the laws and regulations of the PRC or local province that may affect our operations; |
| ● | expand our customer base; |
| ● | maintain adequate control of default risks and expenses allowing us to realize anticipated revenue growth; |
| ● | implement our growth strategies and plans and adapt and modify them as needed; |
| ● | integrate any future business combinations; and |
| ● | anticipate and adapt to changing conditions in the Chinese industrial and mining recycling industry resulting from changes in government regulations, mergers and Business Combinations involving our competitors, and other significant competitive and market dynamics. |
If we are unable to address any or all of the foregoing risks, our business may be materially and adversely affected.
Similarly, Jiangsu Ronghai started operation in May 2009 and also have a limited operations history. While Jiangsu Ronghai generated $18.31 million in revenue in 2017 and $17.47 million in revenue in 2018, respectively. But the growth rate in history cannot be indicative of future performance. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving industries such as the coal products and alternative energy industries in China. Jiangsu Ronghai’s limited history for selling steam coal may not serve as an adequate basis to judge our future prospects and results of operations. Our operations are subject to all of the risks, challenges, complications and delays frequently encountered in connection with the operation of any new business, as well as those risks that are specific to the coal trading industry. Investors should evaluate us in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products and technologies. Despite our best efforts, we may never overcome these obstacles.
Changes policies and regulations, as well as local environmental requirements on exploiting and using coal or its products, are likely to have an impact on the coal market, which will affect the company’s earnings.
Competition in the industrial and mining recycling industry is likely to grow and could cause us to lose market share and revenues in the future.
We believe that the industrial and mining recycling industry is an emerging market in China. we may face growing competition in the industrial and mining recycling industry, and We believe that the industrial and mining recycling industry is expected to become more competitive as this industry matures and begins to consolidate. We will compete with several companies in the purification and recycling of industrial waste residue by the permanent magnet device and technology. Some of these competitors will likely have substantially greater financial, marketing and other resources than us. As a result, we could lose market share and its revenues could decline, thereby adversely affecting our earnings and potential for growth. While we believe that it will be able to successfully compete in this area as a result of its proprietary technology, there is no assurance that it will be able to hire and retain the necessary employees and compete successfully.
As the government starts to impose stricter policies on Environmental Protection, the mining recycling market gets bigger. The competition could become increasingly fierce in the near future. Furthermore, the Company’s technology has been industrialized which is relatively mature, which is a not pure brand new technology.
22
Our solid waste recycling systems business requires highly qualified personnel, and if we are unable to hire or retain qualified personnel, then it may not be able to grow effectively.
Our business’ success depends upon its ability to attract and retain highly qualified personnel. Expansion of our solid waste recycling systems business may require additional managers and employees with relevant industry experience, and its success will be highly dependent on its ability to attract and retain skilled management personnel and other employees. We may not be able to attract or retain highly qualified personnel. In addition, competition for skilled personnel is significant in China. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees. We may incur additional expenses to recruit and retain qualified replacements and its businesses may be disrupted and its financial condition and results of operations may be materially and adversely affected. In addition, key managers may join a competitor or form a competing company. An operating company may not be able to successfully enforce any contractual rights with its management team, in particular in China, where all of these individuals reside.
If Shengrong WFOE and Wuhan Host fail to retain certain of their key personnel and attract and retain additional qualified personnel, neither Shengrong WFOE nor Wuhan Host might be able to remain competitive, continue to expand its technology or pursue growth.
Shengrong WFOE’s future success depends upon the continued service of certain of its executive officers and other key research and development personnel, such as Ms. Jianzhen Li and Mr. Xiaonian Zhang who possess longstanding industry relationships and technical knowledge of Shengrong WFOE’s products and operations. Although we believe that our relationship with these individuals is positive, there can be no assurance that the services of these individuals will continue to be available to us in the future. There can be no assurance that these persons will agree to continue to be employed by us after the expiration dates of their current contracts.
Similarly, Wuhan Host’s success depends in large part on its ability to attract and retain highly qualified management, administrative, manufacturing, sales, and research and development personnel. Due to the specialized nature of its business, it may be difficult to locate and hire qualified personnel. The loss of services of one of its executive officers or other key personnel, or failure to attract and retain other executive officers or key personnel could have a material adverse effect on our business, operating results and financial condition. Although Wuhan Host has been successful in planning for and retaining highly capable and qualified successor management in the past, there can be no assurance that it will be able to do so in the future.
The Company may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the acquisitions of both Wuhan Host and Jiangsu Rong Hai.
Although the Company currently expect to achieve synergies from the Wuhan HOST acquisition of approximately $7.0 million during fiscal 2018, the inclusion of these expected synergy targets should not be viewed as a representation that The Company will in fact achieve these synergies by the end of fiscal 2018, or at all. To the extent the Company fails to achieve these synergies, the Company’s results of operations may be impacted, and any such impact may be material.
The Company has identified various synergies including corporate and division overhead savings, brand enhancement, vendor funds, marketing and advertising cost reduction and operational efficiencies. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and the Company cannot assure you that it will achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other adverse effects on our business. In light of these significant uncertainties, you should not place undue reliance on the Company’s estimated synergies.
Failure to manage Wuhan HOST and Jiangsu Ronghai effectively since its acquisition could materially impact our business.
The Company has recently experienced a period of rapid growth in its operations. In particular, it has significantly increased the size of its customer base due to the acquisition of both Wuhan HOST and Jiangsu Ronghai. The Company anticipates that it will continue to significantly expand its operations and headcount in the near term. However, recent growth has placed, and future growth will place, a significant strain on the Company’s management, administrative, operational and financial infrastructure. The Company’s success will depend in part on its ability to manage both entities effectively. To manage the recent and expected growth of its operations and personnel, The Company will need to continue to improve its operational, financial and management controls and its reporting systems and procedures. Failure to effectively manage Wuhan HOST and Jiangsu Rong Hai could result in difficulty or delays in deploying the Company’s services to customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any of these difficulties could adversely impact the Company’s business performance and results of operations.
23
Wuhan Host expects to incur substantial expenditures in the foreseeable future and may require additional capital to support its business growth. This capital might not be available on terms favorable to us or at all.
In the expansion of Wuhan Host’s business, the company may need external financing. If the debt capital ratio and equity capital ratio cannot be reasonably arranged, the comprehensive capital cost of the company will rise sharply, resulting in the shrinking of the company’s value, and the company may be seriously insolvent.
Wuhan Host particularly expects to incur substantial expenditures in the foreseeable future in connection with the following:
| ● | expansion of sales and marketing efforts; |
| ● | expansion of manufacturing capacity; |
| ● | funding research, development and clinical activities related to our existing products and product platform; |
| ● | funding research, development and clinical activities related to new products; |
| ● | pursuing and maintaining appropriate regulatory clearances and approvals for our existing products and any new products that we may develop; and |
| ● | preparing, filing and prosecuting patent applications, and maintaining and enforcing our intellectual property rights and position. |
In addition, Wuhan Host general and administrative expense may continue to increase due to the additional operational and reporting costs associated with our expanded operations and being a public company.
Wuhan Host anticipates that its principal sources of funds in the future will be revenue generated from the sale of its products. Wuhan Host will need to generate significant additional revenue to achieve and maintain profitability, and even if it achieves profitability, it cannot be sure that it will remain profitable for any substantial period of time. Its failure to become and remain profitable could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue to fund our operations.
It is also possible that Wuhan Host may allocate significant amounts of capital toward products, technologies or geographies for which market demand is lower than anticipated and, as a result, Wuhan Host may subsequently abandon such efforts. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and we may even be required to scale back our operations.
Residential and non-residential construction activity is cyclical and influenced by many factors, and any reduction in the activity in one or both of these markets could have a material adverse effect on the business of Wuhan Host.
The results of operations of Wuhan Host can vary materially in response to market conditions and changes in the demand for its products. Historically, demand for Wuhan’s products has been closely tied to residential construction, non-residential construction, and infrastructure activity in PRC, particularly Hubei province. Wuhan Host’s success and future growth prospects depend, to a significant extent, on conditions in these markets and the degree to which these markets are strong in the future.
24
The Chinese construction industry and related markets are cyclical and have in the past been, and may in the future be, materially and adversely affected by general economic and global financial market conditions. These factors impact not only Wuhan Host’s business, but those of its customers and suppliers as well. This influence is true with respect to macroeconomic factors within PRC.
The markets in the construction industry in which Wuhan Host operates are also subject to other more specific factors. Residential construction activity levels are influenced by and sensitive to a number of factors, including mortgage availability, the cost of financing a home (in particular, mortgage terms and interest rates), unemployment levels, household formation rates, gross domestic product, residential vacancy and foreclosure rates, demand for second homes, existing housing prices, rental prices, housing inventory levels, building mix between single- and multi-family homes, consumer confidence, seasonal weather factors, the available labor pool and government regulation, policy and incentives. Non-residential construction activity is primarily driven by levels of business investment, availability of credit and interest rates, as well as many of the factors that impact residential construction activity levels.
Wuhan Host cannot control the foregoing factors and, although construction activity and related spending levels have increased in recent years, there is still uncertainty regarding whether the growth in construction market will be sustained, and there can be no assurances that there will not be any future downturns. There can be no assurances regarding whether more recent growth in these markets can be sustained or if demand will gradually decrease. If construction activity in these markets, and more generally, does not continue to recover, or if there are future downturns, whether locally, regionally or nationally, our business, financial condition and results of operations could be materially and adversely affected.
Its dependence on key customers with whom Wuhan Host does not have long-term contracts and consolidation within its customers’ industries could have a material adverse effect on Wuhan Host’s operation.
Wuhan Host’s business is dependent on certain key customers. As is customary in the coating industry, Wuhan Host did not enter into long-term contracts with many of its customers. As a result, its customers could stop purchasing its products, reduce their purchase levels or request reduced pricing structures at any time. Wuhan Host may therefore need to adapt our manufacturing, pricing and marketing strategies in response to a customer who may seek concessions in return for its continued or increased business. A loss of one or more customers or a meaningful reduction in their purchases from Wuhan Host or could have a material adverse effect on its business, financial condition and results of operations.
Changes in market interest rates could adversely impact Wuhan Host
Wuhan Host may need additional loans or borrowings to fund its operations. The change of interest rate may make the company face the risk of not being able to pay the principal and interest on time due to the rise of interest rate, which may lead to bankruptcy and liquidation of the company due to insolvency. Wuhan Host’s earnings are impacted by changing interest rates. Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities, and rates paid on deposits and borrowings. These impacts may negatively impact Wuhan Host’s ability to attract deposits, make loans, and achieve satisfactory interest rate spreads, which could adversely affect our financial condition or results of operations.
Interest rates may be affected by many factors beyond our control, including general and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. Market volatility in interest rates can be difficult to predict, as unexpected interest rate changes may result in a sudden impact while anticipated changes in interest rates generally impact the mortgage rate market prior to the actual rate change. Exposure to interest rate risk is managed by monitoring the repricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period. Although we believe the current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates could potentially have an adverse effect on our business, financial condition and results of operations.
25
Wuhan Host business depends upon the maintenance of its proprietary technologies and information.
Wuhan Host depends on its proprietary technologies and information, many of which are no longer subject to patent protection. Wuhan Host relies principally upon trade secret and patent laws to protect its proprietary technologies. It regularly enters into confidentiality agreements with its key employees, customers, potential customers and other third parties and limit access to and distribution of its trade secrets and other proprietary information. However, these measures may not be adequate to prevent misappropriation of its technologies or to assure that its competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. In addition, the laws of PRC in which we operate may not protect Wuhan Host’s proprietary rights to the same extent as the laws of the United States. Wuhan Host is also subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights.
Its efforts to develop new products and services or enhance existing products and services involve substantial research, development and marketing expenses, and the resulting new or enhanced products or services may not generate sufficient revenues to justify such expenses.
Wuhan Host’s future success will depend in part on its ability to anticipate and respond to changing technologies and customer requirements by enhancing its existing products and services. It will need to develop and introduce, on a timely and cost-effective basis, new products, features and services that address the needs of its customer base. As a result of these efforts, Wuhan Host may be required to expend substantial research, development and marketing resources, and the time and expense required to develop a new product or service or enhance an existing product or service are difficult to predict. It cannot assure that it will succeed in developing, introducing and marketing new products or services or product or service enhancements. In addition, it cannot be certain that any new or enhanced product or service will generate sufficient revenues to justify the expenses and resources devoted to this product development and enhancement effort.
Jiangsu Ronghai’s business and results of operations are dependent on the PRC coal markets, which may be cyclical.
As the revenue is substantially derived from the sale of steam coal, Jiangsu Ronghai’s business and operating results are substantially dependent on the domestic supply of steam coal. The PRC coal market is cyclical and exhibits fluctuation in supply and demand from year to year and is subject to numerous factors beyond our control, including, but not limited to, economic conditions in the PRC, global economic conditions, and fluctuations in industries with high demand for coal, such as the utilities and steel industries. Fluctuations in supply and demand for coal affects coal prices which, in turn, may have an adverse effect on our operating and financial performance. The demand for coal is primarily affected by overall economic development and the demand for coal from the electricity generation, steel and construction industries. The supply of coal, on the other hand, is primarily affected by the geographic location of the coal supplies, the volume of coal produced by domestic and international coal suppliers, and the quality and price of competing sources of coal. Alternative fuels such as natural gas and oil, alternative energy sources such as hydroelectric power and nuclear power, and international shipping costs also impact the market demand for coal. Excess demand for coal may increase coal prices, which would have an adverse effect on the cost of goods sold which would, in turn, cause a short-term decline in our profitability if we are unable to increase the price of our steam coal to our customers. Local government may regulate residential winter heating price and thus causing our residential heating customers not be able to bear high steam coal price. As a result, Jiangsu Ronghai may not be able to increase its steam coal price in response to increased coal price or, Jiangsu Ronghai may have to decrease our steam coal price when it renews contracts with such customers. As a result, Jiangsu Ronghai may not able to keep its gross margin.
26
Our results of operations are subject, to a significant extent, to economic, political and legal developments in the PRC.
Jiangsu Ronghai expects that a majority of coal sales will be made to customers based in the PRC. Accordingly, the economic, political and social conditions, as well as government policies, of the PRC may affect our business. The PRC economy differs from the economies of most developed countries in many respects, including: (i) structure; (ii) level of government involvement; (iii) level of development; (iv) growth rate; (v) control of foreign exchange and (vi) allocation of resources. The PRC economy has been transitioning from a planned economy to a more market-oriented economy. For the past two decades, the PRC government has implemented economic reform measures emphasising the utilisation of market forces in the development of the PRC economy. Changes in the PRC’s political, economic and social conditions, laws, regulations and policies could materially and adversely affect our business and results of operations. In addition, the PRC government indirectly influences coal prices through its regulation of power tariffs and its control over allocation of the transportation capacity of the national rail system. Any significant downturn in coal prices in the PRC could materially and adversely affect our business and results of operations. Additionally, the PRC government could adopt new policies that could shift demand away from coal to other energy sources. Any significant decline in demand for, or over-supply of, coal could materially and adversely affect our revenues from coal export sales.
Competition could put downward pressure on coal prices and, as a result, materially and adversely affect our revenues and profitability.
Jiangsu Ronghai competes with numerous other domestic and foreign coal producers for domestic sales. Overcapacity and increased production within the domestic coal industry, and decelerating steel demand in Asia have at times, and could in the future, materially reduce coal prices and therefore materially reduce our revenues and profitability. Potential changes to international trade agreements, trade policies, trade concessions or other political and economic arrangements may benefit coal producers operating in countries other than China. We may not be able to compete on the basis of price or other factors with companies that in the future benefit from favorable foreign trade policies or other arrangements. In addition, our ability to ship our coal to international customers depends on port capacity, which is limited. Increased competition within the coal industry for international sales could result in us not being able to obtain throughput capacity at port facilities, or the rates for such throughput capacity increasing to a point where it is not economically feasible to export our coal.
The domestic coal industry has experienced consolidation in recent years, including consolidation among some of our major competitors. In addition, substantial overcapacity exists in the coal industry and several other large coal companies have also filed, and others may file, bankruptcy proceedings which could enable them to lower their productions costs and thereby reduce the price for coal. Consolidation in the coal industry or current or future bankruptcy proceedings of our coal competitors could adversely affect our competitive position.
In addition to competing with other coal producers, Jiangsu Ronghai competes generally with producers of other fuels, such as natural gas. Natural gas pricing has declined significantly in recent years. The decline in the price of natural gas has caused demand for coal to decrease and adversely affected the price of our coal. Sustained periods of low natural gas prices have also contributed to utilities phasing out or closing existing coal-fired power plants and continued low prices could reduce or eliminate construction of any new coal-fired power plants. This trend has, and could continue to have, a material adverse effect on demand and prices for our coal. Moreover, the construction of new pipelines and other natural gas distribution channels may increase competition within regional markets and thereby decrease the demand for and price of our coal.
The occurrence of the COVID-19 pandemic may negatively affect our operations depending on the severity and longevity of the pandemic.
The COVID-19 pandemic is currently impacting countries, communities, supply chains and markets as well as the global financial markets. The outbreak in China resulted in increased travel restrictions, and shutdown of businesses, which may cause slower recovery of the China economy. We may experience impact from quarantines, market downturns, and impact on our workforce if the virus continues to spread. COVID-19 affected a significant number of our workforce employed in our operations, and as a result we are experiencing a slow resumption of operations and may experience delays or the inability to delivery our service on a timely basis. In addition, one or more of our customers, partners, service providers or suppliers may experience financial distress, delayed or defaults on payment, file for bankruptcy protection, sharp diminishing of business, or suffer disruptions in their business due to the outbreak. The extent to which the coronavirus impacts our results will depend on future developments and reactions in China, which are highly uncertain and will include emerging information concerning the severity of the coronavirus and the actions taken by governments and private businesses to attempt to contain the coronavirus. It is likely to result in a potential material adverse impact on our business, results of operations and financial condition in the short run if the situation has gotten worse in China. Wider-spread COVID-19 in China and globally could prolong the deterioration in economic conditions and could cause decreases in or delays in advertising spending and reduce and/or negatively impact our short-term ability to grow our revenues. Any decreased collectability of accounts receivable, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic conditions could negatively impact our results of operations. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission. Depending on the severity and longevity of the COVID-19 pandemic, our business, customers, and shareholders may experience a significant negative impact.
27
Risks Related to Our Corporate Structure
The failure to comply with PRC regulations relating to mergers and acquisition of domestic enterprises by offshore special purpose vehicles may subject the company to severe fines or penalties and create other regulatory uncertainties regarding the company’s corporate structure.
On August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the China Securities Regulatory Commission (“CSRC”), the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation (“SAT”), the State Administration for Industry and Commerce (the “SAIC”), and the State Administration of Foreign Exchange (“SAFE”), jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006, and as amended on June 22, 2009. This regulation, among other things, has certain provisions that require offshore companies formed for the purpose of acquiring PRC domestic companies and controlled directly or indirectly by PRC individuals and companies which are the related parties with the PRC domestic companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval of the CSRC prior to publicly listing special purpose vehicles’ securities on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.
The application of the M&A Rules with respect to the company’s corporate structure remains unclear, with no current consensus existing among leading PRC law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and CSRC approvals under the M&A Rules are not required in the context of the Acquisition because WFOE was incorporated as wholly owned foreign investment enterprise with the approval of local department of commerce. However, we cannot be certain that the relevant PRC government agencies, including the CSRC and MOFCOM, would reach the same conclusion, and we cannot be certain that MOFCOM or the CSRC will not deem that the Acquisition circumvents the M&A Rules, and other rules and notices, or that prior MOFCOM or CSRC approval is required for overseas financing.
If the CSRC, MOFCOM, or another PRC regulatory agency subsequently determines that CSRC, MOFCOM or other approval was required for the Acquisition or the restructuring of Hubei Shengrong, or if prior CSRC approval for overseas financings is required and not obtained, the company may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares of common stock. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas financings, to restructure the company’s corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.
The M&A Rules, along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy.
28
PRC regulations relating to investments in offshore companies by PRC residents may subject The Company’s PRC-resident beneficial owners or its PRC subsidiaries to liability or penalties, limit our ability to inject capital into its PRC subsidiaries or limit its PRC subsidiaries’ ability to increase their registered capital or distribute profits.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC resident holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
SAFE promulgated the Notice of SAFE on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment, or SAFE Circular 13, on February 13, 2015, which was effective on June 1, 2015. SAFE Circular 13 cancels two administrative approval items: foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment, instead. Banks shall directly examine and handle foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment, and SAFE and its branch shall indirectly regulate the foreign exchange registration of direct investment through banks.
If Jiangsu Rong Hai or Wuge fails to maintain the requisite registered capital, licenses and approvals required under PRC law, our business, financial condition and results of operations may be materially and adversely affected.
Foreign investment is highly regulated by the PRC government and local authorities. Jiangsu Ronghai and Wuge are required to obtain and maintain certain licenses or approvals from different regulatory authorities in order to operate its current business. These licenses and approvals will be essential to the operation of their businesses. If Jiangsu Ronghai or Wuge fails to obtain or maintain any of the required licenses or approvals for its business, we may be subject to various penalties, such as fines and the discontinuation or restriction of its operations. Any such disruption in the business operations of Jiangsu Ronghai or Wuge could materially and adversely affect our business, financial condition and results of operations.
29
Risks Related to Doing Business in China
A slowdown of the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact China’s overall economic growth, which could materially adversely affect our business.
We are a holding company and all of the combined company’s operations are entirely conducted in the PRC. Although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may not continue. The annual rate of growth in the PRC declined from 6.6% in 2018 to 6.1% in 2019. According to a recent State Information of China forecast, China’s economic growth rate in 2020 will slow to 6.0%, its lowest since 1990. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for the combined company’s products and may have a materially adverse effect on its business.
China’s economy differs from the economies of most other countries in many respects, including the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods, regions and economic sectors.
The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any actions and policies adopted by the PRC government could negatively impact the Chinese economy or the economy of the region the combined company serves, which could materially adversely affect the combined company’s business.
Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business the combined company may be able to conduct in the PRC and accordingly on the results of its operations and financial condition.
The combined company’s business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which the combined company must conduct its business activities. The combined company’s ability to operate in China may be adversely affected by changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. However, the government of the PRC may not continue to pursue these policies, or may significantly alter these policies from time to time without notice.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing the combined company’s business, or the enforcement and performance of the combined company’s arrangements with borrowers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, as well as encourage foreign investment in China. Although the influence of the law has been increasing, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited volume of published cases and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or regulations in certain less developed areas causes uncertainty and may affect the combined company’s business. Consequently, neither we nor Hubei Shengrong and TJComex can predict the future direction of Chinese legislative activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies and courts in certain areas, may cause possible problems to foreign investors.
30
Jiangsu Ronghai’s businesses are subject to extensive regulation and supervision by state, provincial and local government authorities, which may interfere with the way the combined company conducts its business and may negatively impact its financial results.
Jiangsu Ronghai is subject to extensive and complex state, provincial and local laws, rules and regulations with regard to their loan operations, capital structure, maximum interest rates, allowance for loan losses, among other things, as set out in “Business — Government Regulations.” These laws, rules and regulations are issued by different central government ministries and departments, provincial and local governments and are enforced by different local authorities in Jiangsu Province, the city of Nantong. As a result of the complexity, uncertainties and constant changes in these laws, rules and regulation, including changes in interpretation and implementation of such, Jiangsu Ronghai’s business activities and growth may be adversely affected if they do not respond to the changes in a timely manner or are found to be in violation of the applicable laws, regulations and policies as a result of a different position from theirs taken by the competent authority in the interpretation of such applicable laws, regulations and policies. If Jiangsu Ronghai are found to be not in compliance with these laws and regulations, they may be subject to sanctions by regulatory authorities, monetary penalties and/or reputation damage, which could have a material adverse effect on the combined company’s business operations and profitability.
Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.
We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing 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 our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. 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. We have not made adequate employee benefit payments. We may be required to make up the contributions for these plans as well as to pay late fees and fines, the amount payable of which shall be determined in accordance with 110% of the amount paid by us in the preceding month. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions against us or our management, in China, based upon United States laws, including the U.S. federal securities laws, or other foreign laws.
We are a company incorporated in Nevada. After the Business Combination, substantially all of our operations will be conducted in China, and substantially all of our assets will be located in China. All of our current and proposed directors and officers reside in China, and substantially all of the assets of those persons are located outside of the United States. As a result, Allbright Law, our counsel as to PRC law, has advised us that it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
Allbright Law has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States providing for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors or officers if they decide that the judgment violates the basic principles of PRC laws, national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.
31
Allbright Law has also advised us that in the event shareholders originate an action against a company without domicile in China for disputes related to contracts or other property interests, the PRC courts may accept a cause of action if (a) the disputed contract is concluded or performed in the PRC or the disputed subject matter is located in the PRC, (b) the company (as defendant) has properties that can be seized within the PRC, (c) the company has a representative organization within the PRC, or (d) the parties chose to submit to the jurisdiction of the PRC courts in the contract on the condition that such submission does not violate the requirements of jurisdiction under the PRC Civil Procedures Law. The action may be initiated by the shareholder by filing a complaint with the PRC courts. The PRC courts would determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in such an action unless such foreign country restricts the rights of PRC citizens and companies.
Our ability to pay dividends may be restricted due to foreign exchange control and other regulations of China.
As an offshore holding company, we will rely principally on dividends from our subsidiary in China, WFOE, for our cash requirements. Under the applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside a portion of its after-tax profit to fund specific reserve funds prior to payment of dividends. In particular, at least 10% of its after-tax profits based on PRC accounting standards each year is required to be set aside towards its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.
Furthermore, WFOE’s ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its cash balance. Substantially all of the Operating Companies’ operations are conducted in China and all of the revenue we recognize, through WFOE will be denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, WFOE may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars.
The lack of dividends or other payments from WFOE may limit our ability to make investments or Business Combinations that could be beneficial to our business, pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from WFOE, our liquidity and financial condition will be materially and adversely affected.
Dividends payable to our foreign investors and gains on the sale of our shares of common stock by our foreign investors may become subject to tax by the PRC.
Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council of the PRC, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our shares, and any gain realized from the transfer of our shares, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether we or any of our subsidiaries established outside of China are considered a PRC resident enterprise, holders of shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our shares by such investors are subject to PRC tax, the value of your investment in our shares may decline significantly.
32
Our global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results of operations.
Under the PRC Enterprise Income Tax Law, or the New EIT Law, and its amendment and implementation rules, which became effective in January 2008, an enterprise established outside of the PRC with a “de facto management body” located within the PRC is considered a PRC resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel and human resources, finance and treasury, and Business Combination and disposition of properties and other assets of an enterprise.” On April 22, 2009, the State Administration of Taxation (the “SAT”), issued a circular, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although the SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the resident status of all offshore enterprises for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident enterprise and may therefore be subject to the 25% enterprise income tax on our global income, which could significantly increase our tax burden and materially and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how the new PRC resident enterprise classification for tax purposes may apply, it is also possible that the rules may change in the future, possibly with retroactive effect.
We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On February 3, 2015, the State Administration of Taxation issued an Announcement on Several Issues Concerning Enterprise Income Tax on Income Arising from Indirect Transfers of Property by Non-PRC Resident Enterprises, or Announcement 7, with the same effective date. Under Announcement 7, an “indirect transfer” refers to a transaction where a non-resident enterprise transfers its equity interest and other similar interest in an offshore holding company, which directly or indirectly holds Chinese taxable assets (the assets of an “establishment or place” situated in China; real property situated in China and equity interest in Chinese resident enterprises) and any indirect transfer without reasonable commercial purposes are subject to the PRC taxation. In addition, Announcement 7 specifies the conditions under which an indirect transfer is deemed to lack a reasonable commercial purpose which include: (1) 75% or more of the value of the offshore holding company’s equity is derived from Chinese taxable assets, (2) anytime in the year prior to the occurrence of the indirect transfer of Chinese taxable assets, 90% or more of the total assets (excluding cash) of the offshore holding company are direct or indirect investment in China, or 90% or more of the revenue of the offshore holding company was sourced from China; (3) the functions performed and risks assumed by the offshore holding company(ies), although incorporated in an offshore jurisdiction to conform to the corporate law requirements there, are insufficient to substantiate their corporate existence and (4) the foreign income tax payable in respect of the indirect transfer is lower than the Chinese tax which would otherwise be payable in respect of the direct transfer if such transfer were treated as a direct transfer. As a result, gains derived from such indirect transfer will be subject to PRC enterprise income tax, currently at a rate of 10%.
Announcement 7 grants a safe harbor under certain qualifying circumstances, including transfers in the public securities market and certain intragroup restricting transactions, however, there is uncertainty as to the implementation of Announcement 7. For example, Announcement 7 requires the buyer to withhold the applicable taxes without specifying how to obtain the information necessary to calculate taxes and when the applicable tax shall be submitted. Announcement 7 may be determined by the tax authorities to be applicable to our offshore restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved. Though Announcement 7 does not impose a mandatory obligation of filing the report of taxable events, the transferring party shall be subject to PRC withholding tax if the certain tax filing conditions are met. Non-filing may result in an administrative penalty varying from 50% to 300% of unpaid taxes. As a result, we and our non-resident enterprises in such transactions may become at risk of being subject to taxation under Announcement 7, and may be required to expend valuable resources to comply with Announcement 7 or to establish that we and our non-resident enterprises should not be taxed under Announcement 7, for any restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.
Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became effective in February 2015.
33
Under Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
In February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular 698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
Restrictions on currency exchange may limit our ability to utilize our revenue effectively.
Substantially all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE or banks and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for all of our PRC subsidiaries.
34
Fluctuations in the foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.
The value of the RMB against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Under this policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow range against the U.S. dollar. On June 20, 2010, the PBOC announced that the PRC government would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Since June 2010, the RMB has appreciated more than 10% against the U.S. dollar. In April 2012, the PRC government announced it would allow greater RMB exchange rate fluctuation. On August 11, 12 and 13, 2015, the PRC government successively set the central parity rate for the RMB more than 3% lower in the aggregate than that of August 10, 2015 and announced that it will begin taking into account previous day’s trading in setting the central parity rate. In 2015, the yuan experienced a 4.88% drop in value, and on January 4, 2016 the PRC government set the U.S. dollar-Chinese yuan currency pair to a reference rate of 6.5%, the lowest rate in 4.5 years, on January 6, 2017, the reference rate was 0.9% up-regulated by the PRC government. However, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. As significant international pressure remains on the PRC government to adopt a more flexible currency policy, greater fluctuation of the RMB against the U.S. dollar could result.
Our revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in the RMB. Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our shares in U.S. dollars. Fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting 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 U.S. holder of our shares of common stock, 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 such as the RMB, 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.
Future inflation in China may inhibit economic activity and adversely affect the combined company’s operations.
The Chinese economy has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation. This has caused the PRC government to, from time to time, enact various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the PRC government to once again impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any action on the part of the PRC government that seeks to control credit and/or prices may adversely affect the combined company’s business operations.
35
PRC laws and regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for the combined company to pursue growth through acquisitions in China.
Further to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review and or security review.
The MOFCOM Security Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through agreements control or offshore transactions.
Further, if the business of any target company that the combined company seek to acquire falls into the scope of security review, the combined company may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any contractual agreements. The combined company may grow its business in part by acquiring other companies operating in its industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit its ability to complete such transactions, which could affect its ability to maintain or expand its market share.
In addition, SAFE promulgated the Circular on the Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 19, on June 1, 2015. Under Circular 19, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and the equity investments in the PRC made by the foreign-invested company shall be subject to the relevant laws and regulations about the foreign-invested company’s reinvestment in the PRC. In addition, foreign-invested companies cannot use such capital to make the investments on securities, and cannot use such capital to issue the entrusted RMB loans (except approved in its business scope), repay the RMB loans between the enterprises and the ones which have been transferred to the third party. Circular 19 may significantly limit our ability to effectively use the proceeds from future financing activities as the Chinese subsidiaries may not convert the funds received from us in foreign currencies into RMB, which may adversely affect their liquidity and our ability to fund and expand our business in the PRC.
SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular 16”), on June 9, 2016, which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purpose beyond its business scope or prohibited by PRC Laws or regulations, while such converted RMB shall not be provide as loans to its non-affiliated entities. As Circular 16 is newly issued and SAFE has not provided detailed guidelines with respect to its interpretation or implementation, it is uncertain how these rules will be interpreted and implemented.
36
Failure to comply with the United States Foreign Corrupt Practices Act and Chinese anti-corruption laws could subject us to penalties and other adverse consequences.
As our shares are listed on Nasdaq, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Non-U.S. companies, including some that may compete with us, may not be subject to these prohibitions. In addition, in 2012, the central government of the PRC commenced a far-reaching campaign against corruption. That ongoing campaign involves aggressive enforcement of existing Chinese anti-corruption laws. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. Our employees or other agents may engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
SEC administrative proceedings against the China affiliates of multi-national accounting firms, and/or any related adverse regulatory development in the PRC, may result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act of 1934, as amended, or the Exchange Act.
In December 2012, the SEC brought administrative proceedings against five major accounting firms in China alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the Chinese Securities Regulatory Commission. If the firms do not follow these procedures, the SEC could restart the administrative proceedings.
In the event that the SEC restarts the administrative proceedings or initiates new proceedings against other firms, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our shares may be adversely affected.
If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to our delisting from Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our shares in the United States.
Our management team is unfamiliar with United States securities laws, they may have to expend time and resources becoming familiar with such laws, which could lead to various regulatory issues.
Our current management team are not familiar with United States securities laws. Given the complexity of United States securities laws, our management team may have to expend time and resources becoming familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues, which may adversely affect our operations.
37
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably.
U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company and our business. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our company and business operations will be severely hampered and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.
Our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC filings and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of our company, our SEC reports, other filings or any of our other public pronouncements.
Risks Related to Our Securities
The market price for our common stock may be volatile.
The market price for our common stock may be volatile and subject to wide fluctuations due to factors such as:
| ● | the perception of U.S. investors and regulators of U.S. listed Chinese companies; | |
| ● | actual or anticipated fluctuations in our quarterly operating results; | |
| ● | changes in financial estimates by securities research analysts; | |
| ● | negative publicity, studies or reports; | |
| ● | conditions in Chinese credit markets; | |
| ● | changes in the economic performance or market valuations of other microcredit companies; | |
| ● | announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments; | |
| ● | addition or departure of key personnel; | |
| ● | fluctuations of exchange rates between RMB and the U.S. dollar; and | |
| ● | general economic or political conditions in China. |
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
38
Volatility in our common stock price may subject us to securities litigation.
The market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
There is no guarantee that our warrants will ever be in the money, and they may expire worthless and the terms of our warrants may be amended.
The exercise price for our warrants is $2.88 per one-half of one share ($5.75 per whole share), subject to adjustment. Warrants may be exercised only for a whole number of the Company’s common stock. No fractional shares will be issued upon exercise of the warrants. There is no guarantee that the warrants will ever be in the money prior to their expiration, and they may expire worthless.
A market for the Company’s securities may not continue, which would adversely affect the liquidity and price of our securities.
The price of the Company’s securities may fluctuate significantly due to the market’s reaction and general market and economic conditions. An active trading market for our securities may never develop or, if developed, it may not be sustained. In addition, the price of the Company’s securities can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if the Company’s securities are not listed on, or become delisted from, the Nasdaq Capital Market for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on the Nasdaq Capital Market or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.
The market price of the Company’s securities may be volatile.
Factors affecting the trading price of the Company’s securities may include:
| ● | actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; |
| ● | changes in the market’s expectations about our operating results; |
| ● | success of competitors; |
| ● | our operating results failing to meet the expectation of securities analysts or investors in a particular period; |
| ● | changes in financial estimates and recommendations by securities analysts concerning the Company or the lending market in general; |
| ● | operating and stock price performance of other companies that investors deem comparable to the Company; |
| ● | our ability to market new and enhanced services on a timely basis; |
| ● | changes in laws and regulations affecting our business; |
| ● | commencement of, or involvement in, litigation involving the Company; |
| ● | the Company’s ability to access the capital markets as needed; |
39
| ● | changes in the Company’s capital structure, such as future issuances of securities or the incurrence of additional debt; |
| ● | the volume of common stock available for public sale; |
| ● | any major change in our board or management; |
| ● | sales of substantial amounts of shares of common stock by our directors, executive officers or significant shareholders or the perception that such sales could occur; and |
| ● | general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism. |
Broad market and industry factors may materially harm the market price of the Company’s securities irrespective of our operating performance. The stock market in general, and the Nasdaq Capital Market in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
We have not registered the shares of common stock issuable upon exercise of the warrants under the Securities Act or any state securities laws at this time, and such registration may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise its warrants and causing such warrants to expire worthless.
We have not registered the shares of common stock issuable upon exercise of the warrants under the Securities Act or any state securities laws at this time. However, under the terms of the warrant agreement, we have agreed to use our best efforts to file a registration statement under the Securities Act covering such shares and maintain a current prospectus relating to the common stock issuable upon exercise of the warrants, and to use our best efforts to take such action as is necessary to register or qualify for sale, in those states in which the warrants were initially offered by us, the shares issuable upon exercise of the warrants, to the extent an exemption is not available. We cannot assure you that we will be able to do so. If the shares issuable upon exercise of the warrants are not registered under the Securities Act, we will be required to permit holders to exercise their warrants on a cashless basis under the circumstances specified in the warrant agreement. However, except as specified in the warrant agreement, in no event will we be required to issue cash, securities or other compensation in exchange for the warrants if we are unable to register or qualify the shares underlying the warrants under the Securities Act or applicable state securities laws. If the issuance of the shares upon exercise of the warrants is not so registered or qualified, the warrant holder will not be entitled to exercise such warrant and such warrant may have no value and expire worthless. In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price solely for the shares of common stock included in the units. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying shares of common stock for sale under all applicable state securities laws.
Warrants will become exercisable for the Company’s shares of common stocks, which would increase the number of shares eligible for future resale in the public market and result in dilution to our shareholders.
Each warrant entitles the holder thereof to purchase one-half of one shares of common stock at a price of $2.88 per half share ($5.75 per whole share), subject to adjustment. Warrants may be exercised only for a whole number of the Company’s share of common stock. No fractional shares will be issued upon exercise of warrants. To the extent such warrants are exercised, additional shares of common stocks will be issued, which will result in dilution to the then existing holders of shares of common stock of the Company and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our shares of common stock.
40
We may amend the terms of the warrants in a manner that may be adverse to holders with the approval by the holders of at least 90% of the then outstanding warrants.
Our warrants are issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 90% of the then outstanding warrants to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of the warrants in a manner adverse to a holder if holders of at least 90% of the then outstanding warrants approve of such amendment. Although our ability to amend the terms of the warrants with the consent of at least 90% of the then outstanding warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the warrants, shorten the exercise period or decrease the number of shares of our common stock purchasable upon exercise of a warrant. Our sponsor owns warrants equal to 61.9% of our issued and outstanding warrants. Accordingly, our sponsor may exert a substantial and decisive influence on actions relating to a vote to amend the terms of the warrants, as set forth above.
We may redeem your unexpired warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrants worthless.
We have the ability to redeem outstanding warrants (excluding any placement warrants held by our sponsor or its permitted transferees) at any time after they become exercisable and prior to their expiration, at $0.01 per warrant, provided that the last reported sales price (or the closing bid price of our common stock in the event the shares of our common stock are not traded on any specific trading day) of the common stock equals or exceeds $12.00 per share for any 20 trading days within a 30 trading-day period ending on the third business day prior to the date we send proper notice of such redemption, provided that on the date we give notice of redemption and during the entire period thereafter until the time we redeem the warrants, we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding warrants could force you: (i) to exercise your warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) to sell your warrants at the then-current market price when you might otherwise wish to hold your warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of your warrants.
Our management’s ability to require holders of our warrants to exercise such warrants on a cashless basis will cause holders to receive fewer shares of common stock upon their exercise of the warrants than they would have received had they been able to exercise their warrants for cash.
If we call our public warrants for redemption, our management will have the option to require any holder that wishes to exercise its warrant (including any warrants held by our sponsor, officers, directors or their permitted transferees) to do so on a “cashless basis.” If our management chooses to require holders to exercise their warrants on a cashless basis, the number of shares of common stock received by a holder upon exercise will be fewer than it would have been had such holder exercised his warrant for cash. This will have the effect of reducing the potential “upside” of the holder’s investment in our company.
As an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure may make our common stock less attractive to investors.
For as long as we remain an “emerging growth company” as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our stockholders would be left without information or rights available to stockholders of more mature companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
41
Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital when we need to do it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company”, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations that affect public companies, which could materially adversely affect our results of operations, financial condition, business and prospects.
As a public company and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404(b) and other provisions of the Sarbanes-Oxley Act, as well as Section 14 rules implemented by the SEC and NASDAQ. In addition, our management team will also have to adapt to the requirements of being a public company. We expect that compliance with these rules and regulations will substantially increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our results of operations, financial condition, business and prospects.
The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification of our directors, officers and employees under Nevada law may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to us and our stockholders to the maximum extent permitted under the corporate laws of Nevada. We may also provide contractual indemnification obligations under agreements with our directors, officers and employees. These indemnification obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors, officers and employees for breach of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit the Company and our shareholders.
Risks Related to the Conversion
Your rights as a stockholder of the Company will change as a result of the Conversion and you may not be afforded as many rights as a shareholder of the Company as an exempted company in Cayman Islands under applicable laws and the Proposed Articles under Cayman Islands law as you were as a stockholder of the Company under applicable laws and the Articles of Incorporation and Bylaws under Nevada law.
Because of differences between Nevada law and Cayman Islands law, we will be unable to adopt identical governing documents after the Conversion, but we have attempted to preserve in the Proposed Articles after the Conversion the same allocation of material rights and powers between the stockholder and our Board that exists under the current Bylaws and Certificate of Incorporation before the Conversion. Nevertheless, the Proposed Articles differ from the Company’s Bylaws and Articles of Incorporation, both in form and substance, and your rights as a shareholder will change. For example:
| ● | Under the NRS, a corporation may not engage in a business in combination with an interested stockholder for a period of two years after the time of the transaction in which the person became an interested stockholder. However, there is no equivalent provision under the Companies Law or the Proposed Articles prohibiting business combinations with interested stockholders. |
42
| ● | Under the NRS, any stockholder may, upon written demand under oath stating the purpose thereof, inspect the corporation’s books and records for a proper purpose during the usual hours for business. However, shareholders of a Cayman Islands exempted company do not have any general rights under Cayman Islands law to inspect corporate records of such company, and the Proposed Articles provide that the directors have the discretion as to whether, to what extent, when, where and under what conditions or regulations the accounts and books of the Company may be open to the inspection of shareholders who are not directors. |
| ● | Under the NRS, a stockholder may bring a derivative suit provided the requirements to do so under the NRS have been met. However, as a general rule, a derivative action may not be brought by a minority shareholder of a Cayman Islands exempted company, and a minority shareholder may be entitled to bring a derivative action on behalf of the Company after the Conversion only in certain limited circumstances. |
The laws of the Cayman Islands may not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States.
After the Conversion, our corporate affairs will be governed by the Proposed Articles, by the Companies Law, and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to the Company under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of its directors, although clearly established under Cayman Islands law, are not specifically prescribed in statute or a particular document in the same way that they are in certain statutes or judicial precedents in some jurisdictions of the United States. In particular, the Cayman Islands has a different body of securities laws relative to the United States. Therefore, our shareholders may have more difficulty protecting their interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. There is uncertainty as to whether the courts of the Cayman Islands would entertain original actions brought in the Cayman Islands against the Company predicated upon the civil liabilities provisions of U.S. securities laws.
As a result of different shareholder voting requirements in the Cayman Islands relative to Nevada, we will have less flexibility with respect to our ability to amend our constitutional documents and enter into certain business combinations than we now have.
Under Nevada law and our current Bylaws and Certificate of Incorporation, our Bylaws and Articles of Incorporation may be amended by the vote of a majority of shares of stock entitled to vote on the matter to approve the amendment, unless the Articles of Incorporation requires the vote of a greater number of shares. Cayman Islands law requires a special resolution of at least two-thirds of the shareholder votes cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting for any amendment to the Proposed Articles. As a result of this Cayman Islands law requirement, situations may arise where the flexibility we now have under Nevada law would have provided benefits to our stockholders that will not be available in the Cayman Islands.
In addition, under Cayman Islands law and the Proposed Articles, certain corporate transactions, such as a merger, require the approval of a special resolution of at least two-thirds of the shareholder votes cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting or, if the share capital of the Company is divided into different classes of shares, the rights attached to any class of shares may be varied with the sanction of a special resolution at a general meeting of the holders of the shares of that class. By contrast, a merger under Nevada law would only require a simple majority of the outstanding stock of the company entitled to vote thereon. The increased shareholder approval requirements may limit our flexibility to enter into or complete certain business combinations that may be beneficial to shareholders.
43
The expected benefits of the Conversion may not be realized.
We have presented in this Information Statement the anticipated benefits of the Conversion. Please see the section entitled “Conversion of the Company from Nevada to Cayman Islands—Purpose of the Conversion.” We cannot be assured that all of the goals of the Conversion will be achievable, and some or all of the anticipated benefits of the Conversion may not occur, particularly as the achievement of the benefits are in many important respects subject to factors that we do not control. These factors would include such things as the reactions of third parties with whom we enter into contracts and do business and the reactions of investors and analysts. In addition, the anticipated reduction of SEC reporting requirements and related expenses may not be achieved in the event of changes to the SEC rules applicable to foreign private issuers or if we fail to qualify as a foreign private issuer. While we expect the Conversion will enable us to reduce our operational, administrative, legal and accounting costs over the long term, these benefits may not be achieved.
As a foreign private issuer, we will not be required to provide its shareholders with the same information as the Company would if the Company remained a U.S. public issuer and, as a result, you may not receive as much information about the Company as you did about the Company and you may not be afforded the same level of protection as a shareholder under applicable laws and the Proposed Articles as you were as a stockholder under applicable laws and the Company Articles of Incorporation and Bylaws.
Following the completion of the Conversion, we are expected to qualify as a “foreign private issuer” under the rules and regulations of the SEC. We will remain subject to the mandates of the Sarbanes-Oxley Act, and, as long as our ordinary shares are listed on the NASDAQ, the governance and disclosure rules of that stock exchange. However, as a foreign private issuer, we will be exempt from certain rules under the Exchange Act that would otherwise apply if we were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. For example:
| ● | we may include in its SEC filings financial statements prepared in accordance with U.S. GAAP or with IFRS as issued by the IASB without reconciliation to U.S. GAAP; |
| ● | we will not be required to provide as many Exchange Act reports, or as frequently or as promptly, as U.S. companies with securities registered under the Exchange Act. For example, we will not be required to file current reports on Form 8-K within four business days from the occurrence of specific material events. Instead, we will need to promptly furnish reports on Form 6-K any information that we (a) make or are required to make public under the laws of the Cayman Islands, (b) file or are required to file under the rules of any stock exchange or (c) otherwise distribute or are required to distribute to its shareholders. Unlike Form 8-K, there is no precise deadline by which Form 6-K must be furnished. In addition, we will not be required to file its annual report on Form 10-K, which may be due as soon as 60 days after its fiscal year end. As a foreign private issuer, we will be required to file an annual report on Form 20-F within four months after its fiscal year end; |
| ● | we will not be required to provide the same level of disclosure on certain issues, such as executive compensation; |
| ● | we will not be required to conduct advisory votes on executive compensation; |
| ● | we will be exempt from filing quarterly reports under the Exchange Act with the SEC; |
| ● | we will not be subject to the requirement to comply with Regulation FD, which imposes certain restrictions on the selected disclosure of material information; |
| ● | we will not be required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and |
| ● | we will not be required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction. |
44
We expect to take advantage of these exemptions if the Conversion is effected. Accordingly, after the completion of the Conversion, if you hold our securities, you may receive less information about the Company and our business than you currently receive and be afforded less protection under the U.S. federal securities laws than you are entitled to currently. However, consistent with our policy of seeking input from, and engaging in discussions with, our stockholders, on executive compensation matters, we intend to provide disclosure relating to its executive compensation philosophy, policies and practices and conduct an advisory vote on executive compensation once every three years after the Conversion is effected. However, we expect to review this practice after the next such advisory vote and may at that time or in the future determine to conduct such advisory votes more frequently or to not conduct them at all.
If we fail to qualify as a foreign private issuer upon completion of the Conversion, or loses its status as a foreign private issuer at some future time, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not incur as a foreign private issuer.
Following completion of the Conversion, we are expected to qualify as a “foreign private issuer” under the rules and regulations of the SEC. As a foreign private issuer, we will be exempt from certain rules under the Exchange Act that would otherwise apply if we were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. Please see the section entitled “Item 1A. Risk Factors—Risks Related to the Conversion—As a foreign private issuer, we will not be required to provide its shareholders with the same information as the Company would if the Company remained a U.S. public issuer and, as a result, you may not receive as much information about we as you did about the Company and you may not be afforded the same level of protection as a shareholder under applicable laws and the Proposed Articles as you were as a stockholder under applicable laws and the Company Articles of Incorporation and Bylaws.” While we are expected to qualify as a foreign private issuer following the completion of the Conversion, if we fail to qualify as a foreign private issuer upon completion of the Conversion, or loses its status as a foreign private issuer at some future time, we will be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not incur as a foreign private issuer.
If we prepare our financial statements in accordance with IFRS following the Conversion, there may be a significant effect on our reported financial results.
The SEC permits foreign private issuers to file financial statements in accordance with IFRS as issued by IASB. At any time in the future, as a foreign private issuer, we may decide to prepare our financial statements in accordance with IFRS as issued by the IASB. The application by us of different accounting standards, a change in the rules of IFRS as issued by the IASB, or in the SEC’s acceptance of such rules, could have a significant effect on our reported financial results. Additionally, U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. IFRS are subject to interpretation by the IASB. A change in these principles or interpretations could have a significant effect on our reported financial results.
Changes in domestic and foreign laws, including tax law changes, could adversely affect the Company, its subsidiaries and its shareholders, and our effective tax rate may increase whether we effect the Conversion or not.
Changes in tax laws, regulations or treaties or the interpretation or enforcement thereof, in both or either of the U.S. or Cayman Islands, could adversely affect the tax consequences of the Conversion to an exempted company in Cayman Islands and the shareholders and/or our effective tax rates (whether associated with the Conversion or otherwise). While the Conversion is not anticipated to have any material impact on our effective tax rate, there is uncertainty regarding the tax policies of the jurisdictions where we operate, and our effective tax rate may increase and any such increase may be material.
45
The enforcement of civil liabilities against the Company may be more difficult.
After the Conversion, all of our executive officers and directors will continue to reside outside of the United States. As a result, it may be more difficult to serve legal process within the United States upon any of these persons and it may also be difficult to enforce, both in and outside of the United States, judgments you may obtain in the U.S. courts against these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. Because we will be a Cayman Islands corporation, investors could also experience more difficulty enforcing judgments obtained against the Company in U.S. courts than would currently be the case for U.S. judgments obtained against the Company. In addition, it may be more difficult (or impossible) to bring some types of claims against the Company in Cayman Islands courts than it would be to bring similar claims against a U.S. company in a U.S. court.
The market for our shares after the Conversion may differ from the market for our shares before the Conversion.
Although it is anticipated that the our ordinary shares after the Conversion, Name Change and Symbol Change will continue to be listing on NASDAQ under the symbol “CCNC,” as a company incorporated under the laws of the Cayman Islands, the shares may appeal to different institutional investors, or impact the level of investment by current investors who may prefer or be required by internal guidelines to invest in companies that are incorporated in the United States. Accordingly, the reorganization may impact our institutional investor base, or the level of their respective investments in our securities, and may result in a change in the market prices, trading volume and volatility of the shares before and after the Conversion.
We expect to incur transaction costs and adverse financial consequences in the year of completion of the Conversion.
We expect a total of approximately $30,000 in transaction costs in connection with the Conversion, which have been and will continue to be expensed as incurred. The substantial majority of these costs will be incurred regardless of whether the Conversion is completed and prior to your vote on the proposal. We expect to incur costs and expenses, including professional fees, to comply with the Cayman Islands corporate and other laws. In addition, we expect to incur attorneys’ fees, accountants’ fees, filing fees, mailing expenses, proxy solicitation fees and financial printing expenses in connection with the Conversion, even if the Conversion is not approved or completed.
The Conversion also may negatively affect us by diverting attention of our management and employees from our operating business during the period of implementation and by increasing other administrative costs and expenses.
Our Board of Directors may choose to defer or abandon the Conversion.
Completion of the Conversion may be deferred or abandoned, at any time, by action of our Board of Directors. While we currently expect the Conversion to take place promptly after certain regulatory requirements and approvals are met and obtained, our Board of Directors may defer or abandon the Conversion because of, among other reasons, changes in existing or proposed laws, our determination that the Conversion would involve tax or other risks that outweigh their benefits, our determination that the level of expected benefits associated with the Conversion would otherwise be reduced, a dispute with the taxation authorities over the Conversion (or certain aspects thereof), an unexpected increase in the cost to complete the Conversion or any other determination by our Board of Directors that the Conversion would not be in the best interests of the Company or its stockholders or that the Conversion would have material adverse consequences to the Company or its stockholders.
46
Item 1B. Unresolved Staff Comments
None.
Shengrong WFOE current executive office is located at No. 21 Jiefang Avenue, Qiaokou District, Wuhan, Hubei, China. The rent for this space is approximately $5,200 per month. The carrying value for this space is approximately $1.3 million.
Hubei HOST’ office is located at Xingye Road, Gedian Development District, E Zhou City, Hubei, China, which solely owned by Hubei HOST.
Jiangsu Ronghai’s office is located at 4th Floor, West Hongqiao Building, No.180 West Qingnian Road, Nantong City, Jiangsu, China. The rent for this space is approximately RMB225,600 per year.
Wuge’s office is located at 119 Zhaojuesi South Road, Room 2-1, Chengshu City, Sichuan, China. The rent for this office is approximately RMB 400,000 per year.
We consider our current office space adequate for our current operations.
To the knowledge of our management, there is no litigation currently pending or contemplated against us, any of our officers or directors in their capacity as such or against any of our property.
Item 4. Mine Safety Disclosures
Not applicable.
47
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
(a) Market Information
Our common stock and warrants are traded on the NASDAQ Capital Market and OTC Market under the symbols “TMSR” and “TMSRW, respectively.
The table below sets forth, for the calendar quarter indicated, the high and low bid prices of our units, common stock and warrants as reported on the Nasdaq for the period of January 1, 2018 through December 31, 2019
| Common Stock | Warrants | |||||||||||||||
| Low | High | Low | High | |||||||||||||
| Year Ended December 31, 2018 | ||||||||||||||||
| January 1, 2018 through March 31, 2018 | $ | 4.5 | $ | 4.95 | $ | 0.10 | $ | 0.10 | ||||||||
| April 1, 2018 through June 30, 2018 | $ | 3.60 | $ | 4.10 | $ | 0.10 | $ | 0.40 | ||||||||
| July 1, 2018 through September 30, 2018 | $ | 3.73 | $ | 5.25 | $ | 0.18 | $ | 0.61 | ||||||||
| October 1, 2018 through December 31, 2018 | $ | 2.00 | $ | 3.10 | $ | 0.03 | $ | 0.20 | ||||||||
| Year Ended December 31, 2019 | ||||||||||||||||
| January 1, 2019 through March 31, 2019 | $ | 1.21 | $ | 5.52 | $ | 0.12 | $ | 0.38 | ||||||||
| April 1, 2019 through June 30, 2019 | $ | 1.37 | $ | 1.97 | $ | 0.12 | $ | 0.17 | ||||||||
| July 1, 2019 through September 30, 2019 | $ | 0.79 | $ | 1.62 | $ | 0.03 | $ | 0.13 | ||||||||
| October 1, 2019 through December 31, 2019 | $ | 0.7 | $ | 1.25 | $ | 0.03 | $ | 0.13 | ||||||||
On April 16, 2020, our common stock had a closing price of $2.11 and our warrants had been thinly traded.
(b) Holders
On April 16, 2020 there were 341 holders of record of our common stock and 2 holders of record of our warrants.
(c) Dividends
We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends in the foreseeable future. In addition, our board of directors is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future.
48
(d) Securities Authorized for Issuance Under Equity Compensation Plans.
None.
(e) Recent Sales of Unregistered Securities
On April 4, 2019, the Company entered into certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the Company issued 1,492,000 shares of its common stock, par value $0.0001 per share, at a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million. The shares issued in the securities purchase agreement are exempt from the registration requirements of the Securities Act, pursuant to Regulation S promulgated thereunder.
On December 23, 2019, the Company entered into certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act, pursuant to which the Company issued 3,692,859 shares of its common stock, par value $0.0001 per share, at a per share purchase price of $1.00 on January 21, 2020. The shares issued in the securities purchase agreement are exempt from the registration requirements of the Securities Act, pursuant to Regulation S promulgated thereunder.
On January 24, 2020, the Company issued an aggregate of 4,000,000 shares of its common stock, par value $0.0001 per share, to all the shareholders of Sichuan Wuge Network Games Co., Ltd. (“Wuge”), pursuant to a share purchase agreement with Wuge, in exchange for the Wuge’s shareholders’ approval to cause Wuge to enter into, certain contractual agreements with Tongrong Technology (Jiangsu) Co., Ltd. (“Tongrong WFOE”), the Company’s indirectly owned subsidiary, through which Tongrong WFOE shall have the right to control, manage and operate Wuge in return for a service fee equal to 100% of Wuge’s net income. The shares issued in the securities purchase agreement are exempt from the registration requirements of the Securities Act, pursuant to Regulation S promulgated thereunder.
(f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data
Disclosure in response to this Item is not required for a smaller reporting company.
49
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview
During the fiscal year ended December 31, 2019, we were primarily engaged in three segments of business: (1) solid waste recycling systems business; (2) coal and coke wholesale business; and (3) coating materials business.
50
Key Factors that Affect Operating Results
Management has observed the trends and uncertainties of government efforts to control the industrial solid wastes discharge, which we believe may have a direct impact on our operations in the near future.
Although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may not continue. According to the National Bureau of Statistics in China (“NBS”), the annual rate of growth in the PRC declined from 7.7% in 2013 to 7.4% in 2014, 6.9% in 2015, 6.7% in 2016, and 6.9% in 2017 and dropped to 6.6% in 2018. The expected growth rate in 2019 will be 6.2%. A further slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for the combined company’s selling of coating and fuel materials and may have a materially adverse effect on its business.
Our operating subsidiaries are incorporated, and our operations and assets are primarily located, in China. Accordingly, our results of operations, financial condition and prospects are affected by China’s economic and regulation conditions in the following factors: (a) an economic downturn in China or any regional market in China; (b) economic policies and initiatives undertaken by the Chinese government; (c) changes in the Chinese or regional business or regulatory environment affecting our customers; and (e) Changes in the Chinese government policy on industrial solid waste. Unfavorable changes could affect demand for services that we provide and could materially and adversely affect the results of operations. Although the Company has generally benefited from China’s economic growth and the policies to encourage the improvement of reducing of solid waste discharge, the Company is also affected by the complexity, uncertainties and changes in the Chinese economic conditions and regulations governing the mining industry.
Our recycling systems and equipment operations are largely affected by the testing result of installed solid waste recycling systems and equipment. If an installed solid waste recycling system or equipment cannot meet the acceptance standards stated on the sales contract, which usually include the outlook of the systems and equipment, the recycled rate of low magnetic catalysts and the physical and chemical index of low magnetic catalysts, then we need to adjust the systems and equipment until their performance meets the acceptance standards. Only after the testing results meet the standards, the products can be considered delivered and title passed to customers, and we can recognize sales.
Our fuel materials, mainly coal, operations are largely affected by the following aspects. First, the PRC's macroeconomic growth is not as fast as expected; the slowdown of economic growth will affect the demand of the market, and the reduction of coal consumption by enterprises will affect the sales of coal and directly affect our earnings. Second, the coal market price fluctuation will also affect our sales revenue; because Jiangsu Rong Hai has long-term and stable customers, the price fluctuations will affect the cost of purchasing coal and thus affect our revenue. Third, the risk of price fluctuation in the shipping industry. The fluctuation of shipping price will also directly affect the fluctuation of coal market price, thus affecting our income. Fourth, we have long-term and stable customers and continues to rely on a small number of customers from 2009 to 2019. Losing our major customers will have a significant impact on our results of operations. In addition, the payment situation of these customers will be affected by abnormal market changes, which will have a negative impact on our business recovery accounts and cash flow.
As a result of the COVID-19 pandemic, we might see a slowdown in revenue growth in first and second quarter 2020 as our businesses might be negatively impacted by the novel coronavirus (COVID-19) outbreak. For a detailed description of the risks associated with the novel coronavirus, see Recent Developments and "Risk Factors—Risks Related to Our Business and Operations—The occurrence of the COVID-19 pandemic may negatively affect our operations depending on the severity and longevity of the pandemic." Because of the significant uncertainties surrounding the COVID-19 outbreak, the extent of the business disruption and the related financial impact cannot be reasonably estimated at this time.
51
Results of Operations
Year Ended December 31, 2019 as Compared to the Year Ended December 31, 2018
| Percentage | ||||||||||||||||
| 2019 | 2018 | Change | Change | |||||||||||||
| Revenues – Equipment and systems | $ | - | $ | - | $ | - | - | |||||||||
| Revenues – Fuel materials | 18,955,988 | 1,106,923 | 17,849,065 | 1612.5 | % | |||||||||||
| Revenues – Trading and others | 628,489 | 346,153 | 282,336 | 81.6 | % | |||||||||||
| Total revenues | 19,584,477 | 1,453,076 | 18,131,401 | 1247.8 | % | |||||||||||
| Cost of Revenues – Equipment and systems | - | - | - | - | ||||||||||||
| Cost of Revenues – Fuel materials | 18,699,429 | 1,075,215 | 17,624,214 | 1639.1 | % | |||||||||||
| Cost of Revenues – Trading and others | 322,813 | 43,956 | 278,857 | 634.4 | % | |||||||||||
| Total cost of revenues | 19,022,242 | 1,119,171 | 17,903,071 | 1599.7 | % | |||||||||||
| Gross profit | 562,235 | 333,905 | 228,330 | 68.4 | % | |||||||||||
| Operating expenses | 851,638 | 747,823 | 103,815 | 13.9 | % | |||||||||||
| Loss from operations | (289,403 | ) | (413,918 | ) | 124,515 | (30.1 | )% | |||||||||
| Other income (expense), net | 3,920 | 13,122 | (9,202 | ) | (70.1 | )% | ||||||||||
| Loss from continuing operations | (414,283 | ) | (405,124 | ) | (9,159 | ) | 2.3 | % | ||||||||
| Discontinued operations: | ||||||||||||||||
| (Loss) income from discontinued operations, net of taxes | (16,412,060 | ) | 1,855,116 | (18,267,176 | ) | (984.7 | )% | |||||||||
| Net (loss) income | (16,826,343 | ) | 1,449,992 | (18,276,335 | ) | (1260.4 | )% | |||||||||
Revenues
The Company’s revenue consists of solid waste recycling systems and equipment revenue, coating and fuel materials revenue, and trading and others revenue. Total revenues increased by approximately $18.1 million, or approximately 1,247.8 %, to approximately $19.6 million for the year ended December 31, 2019, compared to approximately $1.5 million for the year ended December 31, 2018. The overall increase in total revenue was attributable to the Company’s has discontinued Wuhan Host and Shengrong WFOE.
Fuel Revenue
During the year ended December 31, 2019, we sold 240,597 tons of coal after Rong Hai being acquired with an average selling price of approximately $78.79 per ton.
Others Revenue
Our other revenues increased by approximately $0.3 million, or 81.6%, to approximately $0.6 million for the year ended December 31, 2019 as compared to approximately $0.3 million for the year ended December 31, 2018. The increase was mainly due to increased harbor cargo handling revenue of Rong Hai.
Cost of Revenues
The Company’s cost of revenues consists of cost of solid waste recycling systems, cost of coating and fuel materials, and cost of trading and others. Total cost of revenues increased by approximately $17.9 million, or approximately 1,599.7% to approximately $19.0 million for the year ended December 31, 2019, compared to approximately $1.1 million for the same period in 2018. Our total cost of revenues increase was attributable to the Company’s general increase in revenue for fuel materials.
Cost of Fuel Materials Revenue
During the year ended December 31, 2019, we sold 240,597 tons of coal after Rong Hai being acquired with an average unit cost of approximately $77.72.
Cost of Others Revenue
Cost of others revenue increased by approximately $0.3 million or 634.4%, to approximately $0.3 million for the year ended December 31, 2019, compared to $0.04 million for the same period in 2018. The increase was mainly due to increased harbor cargo handling revenue of Rong Hai.
52
Gross Profit
The Company’s gross profit increased by approximately $0.2 million, or 68.4%, to approximately $0.6 million during the year ended December 31, 2019, from approximately $0.3 million for the year ended December 31, 2018. The increase was due to the Company’s increased harbor cargo handling revenue which typically has higher gross margins because there is limited competition at the harbor where the Company operates such service.
Operating Expenses (Income)
The Company’s operating expenses (income) include selling, general and administrative (“SG&A”) expenses, (recovery of) provision for doubtful accounts.
SG & A expenses increased by approximately $0.1 million, by approximately 13.9%, from approximately $0.7 million for the year ended December 31, 2018 to approximately $0.9 million for the year ended December 31, 2019. The slight increase was due to slight increases in general and administrative expenses from the Company’s investment in professional staff as part of the general expense of maintaining as public company.
Loss from Operations
As a result of the foregoing, loss from operations for the year ended December 31, 2019 was approximately $(0.3) million, a decrease of approximately $0.1 million, or approximately 30.1%, from approximately $(0.4) million for the year ended December 31, 2018. The decrease of loss was a result of improved gross profit, partially offset by an increase in selling, general and administrative expenses.
Net Income (Loss)
As a result of the foregoing, net income decreased by approximately $18.3 million, or 1260.4%, to approximately $(16.8) million for the year ended December 31, 2019, from approximately $1.5 million for the same period in 2018.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.
Accounts receivable, net
Accounts receivable include trade accounts due from customers. An allowance for doubtful accounts may be established and recorded based on management’s assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
53
Inventories
Inventories are comprised of raw materials and work in progress and are stated at the lower of cost or net realizable value using the first-in-first-out method in Shengrong WFOE and weighted average method in Wuhan HOST and Rong Hai. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually and records a reserve against the inventory when the carrying value exceeds net realizable value.
Prepayments
Prepayments are funds deposited or advanced to outside vendors for future inventory purchases. As a standard practice in China, many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis. This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.
Fair value measurement
The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by us. The Company considers the carrying amount of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities, customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Revenue recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue, other than warranty revenues, was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the Company’s warranty revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.
The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are primarily recognized at a point in time except for the warranty revenues where the warranty periods are recognized over the warranty period, usually is a period of twelve months.
54
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition except its warranty revenues.
An entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but does not control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is entitled to retain in the exchange.
Revenue from equipment and systems, revenue from coating and fuel materials, and revenue from trading and others are recognized at the date of goods delivered and title passed to customers, when a formal arrangement exists, the price is fixed or determinable, the Company has no other significant obligations and collectability is reasonably assured. Such revenues are recognized at a point in time after all performance obligations are satisfied under the new five-step model. In addition, training service revenues are recognized when the services are rendered and the Company has no other obligations, and collectability is reasonably assured. These revenues are recognized at a point in time.
Prior to January 1, 2018, the Company allowed its customers to retain 5% to 10% of the contract price as retainage during the warranty period of 12 months to guarantee product quality. Retainage is considered as a payment term included as a part of the contract price, and was recognized as revenue upon the shipment of products. Due to nature of the retainage, the Company’s policy is to record revenue the full value of the contract without VAT, including any retainage, since the Company has experienced insignificant warranty claims historically. Due to the infrequent and insignificant amount of warranty claims, the ability to collect retainage was reasonably assured and was recognized at the time of shipment. On January 1, 2018, upon the adoption of ASU 2014-09 (ASC 606), revenues from product warranty are recognized over the warranty period over 12 months. For the year ended December 31, 2018, less than 5% of our warranty revenues were recognized in our consolidated revenues and included in the Company’s equipment and systems revenues in the accompanying statements of income and comprehensive income.
Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
Gross versus Net Revenue Reporting
Starting from July 2016, in the normal course of the Company’s trading of industrial waste materials business, the Company directly purchases the processed industrial waste materials from the Company’s suppliers under the Company’s specifications and drop ships the materials directly to the Company’s customers. The Company would inspect the materials at its customers’ site, during which inspection it temporarily assumes legal title to the materials, and after which inspection legal title is transferred to its customers. In these situations, the Company generally collects the sales proceed directly from the Company’s customers and pay for the inventory purchases to the Company’s suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the new accounting guidance for principal-agent considerations. Since the Company is the primary obligor and is responsible for (i) fulfilling the processed industrial waste materials delivery, (ii) controlling the inventory by temporarily assume legal title to the materials after inspecting the products from our vendors before passing the materials to our customers, and (iii) bearing the back-end risk of inventory loss with respect to any product return from the Company’s customers, the Company has concluded that it is the principal in these arrangements, and therefore report revenues and cost of revenues on a gross basis.
55
Recently Issue Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016- 02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. This ASU will be effective for the Company on January 1, 2019. The Company occupies an office under operating lease agreement with a term longer than 12 months for which prior to adoption of the guidance are not reflected in its consolidated balance sheet at December 31, 2018 and 2017. We will adopt ASU 2016-02 on January 1, 2019 and recognize additional operating labilities of approximately $190,000, with corresponding right of use (“ROU”) assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases with a term longer than 12 months.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We do not believe the adoption of this ASU would have a material effect on our consolidated financial statements.
We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
Liquidity and Capital Resources
The Company has funded working capital and other capital requirements primarily by equity contributions, loans from shareholders, cash flow from operations, short term bank loans, loans from third parties and cash received from JM Global Holding Company through the reverse capitalization. Cash is required to repay debts and pay salaries, office expenses, income taxes and other operating expenses. As of December 31, 2019, our net working capital deficit was approximately $4.1 million, over 21% of the Company’s current liabilities was from other payables – related parties due to major shareholders. Removing these liabilities, the Company had net working capital of $5.3 million and is expected to continuing generate cash flow from operations in the twelve months period.
We believe that current levels of cash and cash flows from operations will be sufficient to meet its anticipated cash needs for at least the next twelve months from the date the consolidated financial statements to be issued. However, it may need additional cash resources in the future if it experiences changed business conditions or other developments, and may also need additional cash resources in the future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed the Company’s amounts of cash and cash equivalents on hand, the Company may seek to issue debt or equity securities or obtain additional credit facility.
56
The following summarizes the key components of the Company’s cash flows for the year ended December 31, 2019 and 2018.
| For the Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net cash provided by (used in) operating activities | $ | 759,457 | $ | (2,038,239 | ) | |||
| Net cash provided by investing activities | - | 2,444,720 | ||||||
| Net cash provided by (used in) provided by financing activities | 2,476,605 | (52,174 | ) | |||||
| Effect of exchange rate change on cash | 64,945 | (89,453 | ) | |||||
| Net change in cash | $ | 3,301,007 | $ | 264,854 | ||||
As of December 31, 2019 and 2018, the Company had cash in the amount of $4,027,744 and $726,737, respectively. As of December 31, 2019, approximately $4,03,000 and approximately $354 were held by the Company’s subsidiaries in the PRC and Hong Kong, respectively. As of December 31, 2018, approximately $719,000 and approximately $8,000 were held by the Company’s subsidiaries in the PRC and Hong Kong, respectively.
Operating activities
Net cash provided by operating activities was approximately $0.8 million for the year ended December 31, 2019, as compared to approximately $2.0 million net cash used in operating activities for the year ended December 31, 2018. Net cash used in operating activities was mainly due to increase of $0.9 million in accounts receivables, increase of $0.2 million in other receivables, increase of $1.3 million in accounts and other receivables, decrease of $2.5 million in prepayments, and the add back of non-cash items including $10.2 million in write down of assets in discontinued operations, and $3.4 million in write down of goodwill for discontinued operations.
Investing activities
Net cash provided by investing activities was approximately $0 million for the year ended December 31, 2019, as compared to approximately $2.4 million net cash provided by investing activities for the year ended December 31, 2018.
Financing activities
Net provided by in financing activities was approximately $2.5 million for the year ended December 31, 2019, as compared to approximately $50,000 net cash used financing activities for the year ended December 31, 2018. Net cash used in financing activities for the year ended December 31, 2019 was mainly due to approximately $0.5 million repayment on short-term bank loan and was offset by the issuance of common stock of approximately $3.0 million to a group of unrelated third party investors in the PRC.
Risks
Credit Risk
Credit risk is one of the most significant risks for the Company’s business.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. Cash held at major financial institutions located in the PRC are not insured by the government. While we believe that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
57
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company normally require prepayment from the customers prior to begin production or delivery products. The Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.
In measuring the credit risk of our sales to our customers, the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.
Liquidity Risk
The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.
Inflation Risk
The Company is also exposed to inflation risk Inflationary factors, such as increases in raw material and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the selling prices of our products do not increase with such increased costs.
Foreign Currency Risk
A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Disclosure in response to this Item is not required for a smaller reporting company.
Item 8. Financial Statements and Supplementary Data
Reference is made to Pages F-1 through F-32 comprising a portion of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report.
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
58
Management’s Report on Internal Controls Over Financial Reporting
As required by the SEC rules and regulations for the implementation of Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company,
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
A “material weakness” is defined under the SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls. As a result of its review, management concluded that we had material weaknesses in our internal control over financial reporting process consisting of the following:
| ● | Inadequate U.S. GAAP expertise. The current accounting staff is inexperienced in applying U.S. GAAP standard as they are primarily engaged in ensuring compliance with PRC accounting and reporting requirement for our consolidated operating entities, and thus require substantial training. The current staff’s accounting skills and understanding as to how to fulfill the requirements of U.S. GAAP-based reporting, including subsidiary financial statements consolidation, are inadequate. |
| ● | No formal plan to provide applicable training for our financial and accounting staff to enhance our understanding of U.S. GAAP and internal control over financial reporting. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect errors or misstatements in our consolidated financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting at December 31, 2019. In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessments and those criteria, management determined that our internal control over financial reporting was not effective at December 31, 2019 due to the material weaknesses identified by our management as described above.
Management Plan to Remediate Material Weaknesses
| ● | We plan to engage outside consultant to supplement efforts to improve our internal control over financial reporting; |
| ● | We plan to acquire applicable training for our financial and accounting staff to enhance our understanding of U.S. GAAP and internal control over financial reporting |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
59
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the name, age and position of each of our executive officers and directors as of the date of this report:
| Name | Age | Position | ||
| Yimin Jin | 47 | Chief Executive Officer and Co-Chairman of the Board | ||
| Wei Xu | 51 | Co-Chairman of the Board | ||
| Yuguo Zhang | 62 | President | ||
| Qihai Wang | 50 | Director | ||
| Xiaonian Zhang | 67 | Vice President | ||
| Bibo Lin | 36 | Vice President | ||
| Yi Li | 42 | Chief Financial Officer and Secretary | ||
| Mingyue Cai (1)(2)(3) | 41 | Director | ||
| Manli Long (1)(2)(3) | 40 | Director | ||
| Mingze Yin(1)(2)(3) | 32 | Director | ||
| Min Zhu(1)(2)(3) | 39 | Director |
| (1) | Member of our Audit Committee |
| (2) | Member of our Compensation Committee |
| (3) | Member of our Nominating and Corporate Governance Committee |
Business Experience and Directorships
The following describes the backgrounds of the director nominees. Our board of directors has determined that (a) other than Messrs. Yimin Jin, Wei Xu and Qihai Wang, all of our directors are independent directors as defined under the NASDAQ Stock Market’s listing standards governing members of boards of directors, and (b) the members of our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee are independent under applicable SEC rules
Mr. Yimin Jin
Mr. Jin was appointed as the Chief Executive Officer and the Co-Chairman of the Board on April 15, 2019. Yimin Jin has extensive experience in investment and financing industry. From 1995 to 2001, Mr. Jin served as the General Manager of Shanghai Pudong Development Bank, and from 2001 to October 2015, Mr. Jin served as the Managing Director of Shanghai Xiefeng Science and Technology Investment Co., Ltd. Mr. Jin has served as general manager of Shanghai Guangdian Assets Management Co., Ltd. since November 2015. Mr. Jin received his college diploma from Shanghai Shanda College in 1993 and received his Bachelor of Finance degree from Shanghai Television University in 1998. Mr. Jin obtained his MSBA degree from Madonna University in 2001. We believe Mr. Jin is well qualified to serve on our board of directors because of his extensive investment experience.
Mr. Wei Xu
Mr. Xu is the inventor of QR code patent and the creator of Code Chain interface. He founded and has served as the chairman of the board of director at Lingkong Group, a Chinese company that engages in systems applications and products in data processing, since August 2006. In July 2019, Mr. Xu founded Sichuan Wuge Network Games Co., Ltd., a technology company that combines IoT and e-commerce that is based on ChainCode interface. From July 1994 to July 2006, Mr. Xu was the COO of NEC IT Management Co., Ltd., the Chinese subsidiary of NEC Japan, a company that provides information technology solutions including but not limited to SAP, SCM and Matrixlink. Mr. Xu received his bachelor’s degree in business administration in China from Fudan University in 1992.
Mr. Yuguo Zhang
Mr. Yuguo Zhang was appointed as the President and the Co-Chairman of the Board on April 25, 2019. Mr. Zhang is a senior partner at Highlights Group. He has been engaged in management service for more than 30 years and has experience in managing various types of large-scale industries including media, port, logistics, etc. He worked as the President’s Assistant at Shanghai Economic News Press (1991-1993). He has served as a director of Jiangsu Siyuan Port Corp. since September 2016 and has been serving as the president of Jiangsu Siyuan Port Co., Ltd. since October 2014. He. From 2012 to 2014, Mr. Zhang served as the president of Jiangsu Xinming Port Co., Ltd., and from 2008 to 2012, Mr. Zhang served as the president of Rugao Port Group. Mr. Zhang received his Bachelor of Chinese Language degree from East China Normal University in 1991 and obtained his MSBA degree from Madonna University in 1999.
60
Mr. Qihai Wang
Mr. Wang was appointed as a director of our Board on April 24, 2019. Mr. Wang is currently the general manager of Jiangsu Ronghai electric power fuel co., LTD., and vice President of Nantong Enterprise Culture Research Association. He has been in the coal industry for more than thirty years. Proficient in bulk trade, transportation, processing and other business. In 1987, He was in charge of coal procurement in Tianjia-an Power Plant. In 2000, he was the general responsible for coal trade in Gansu province of Nanjing Jutai Trading Co., LTD., and in 2004, he was the general responsible for coal purchase in western China of Nantong Linan Industry and Trade co., LTD. Founded Jiangsu Ronghai Electric Power Fuel Co., ltd. in 2009 and has been the general manager since then. Mr. Qihai Wang graduated from Huainan Teachers’ College in July 1993 with a degree in Statistics.
Mr. Xiaonian Zhang
Mr. Zhang became the President and a director of our Company on February 8, 2018. Mr. Zhang resigned from his positions as the President and a director on April 24, 2019 and was appointed as the Vice President of the Company on April 25, 2019. Xiaonian Zhang was appointed to be President and a director of Sunlong in 2017. From 2009 to present, Mr. Zhang has been the general manager and head of technology department in Hubei Shengrong Environmental Protection Energy-Saving Science and Technology Co. Ltd. Over the last decade, Mr. Zhang had been working on R&D and successfully managed a team with a research focus on high efficiency permanent magnetic separation of industrial solid wastes and comprehensive utilization of tailings. Mr. Zhang also held 2 U.S. invention patents on the high efficiency permanent magnetic comprehensive separating technology. Mr. Zhang graduated from Huazhong University of Science and Technology in July 1989 with a Bachelor degree of Automatic Control.
Mr. Bibo Lin
Mr. Lin is the founder and President of Wuge Network Games Co., Ltd., a PRC company contractually controlled by the Company that develops games and combines IoT and e-commerce based on ChainCode interface. Mr. Lin has extensive experience in information technology and Blockchain technology. From September 2018 to May 2019, Mr. Lin was the CEO of Chengdu Yuan Malian Technology Co., Ltd., a PRC company that engaged in technical support of Internet of Things. From December 2017 to July 2018, Mr. Lin was the CEO of Sichuan Hongming Technology Development Co., Ltd., a PRC company that engaged in the development and maintenance of Internet application software. From February 2015 to January 2018, Mr. Lin was the CEO of Chengdu Huasu Internet Technology Service Co., Ltd., a PRC company that engaged in Internet consulting and Internet project development planning. From February 2014 to January 2015, Mr. Lin was the Vice President at Sichuan Tiangou Technology Co., Ltd., a PRC company that operated e-commerce. Prior to that, Mr. Lin worked for Alibaba Sichuan as a sales manager for 7 years.
Ms.Yi Li
Ms. Yi Li was appointed Chief Financial Officer on April 25, 2019. From 2005 to 2007, Ms. Li served as Financial Accounting of Shanghai Supersharp International Co., Ltd. From 2007 to 2009, Ms. Li served as Finance Officer of the HongKong OneByOne Trading & Accessories Co., Ltd. Ms. Li worked as the Financial Manager at Shanghai Yitex Garment Co., Ltd. from 2010 to 2015. Ms. Li served as the Chief Financial Officer of Shanghai Difeng Group since 2015 till now. Ms. Li received her Bachelor degree of International Business and MBA from Auckland Institute of Studies.
61
Ms. Manli Long
Ms. Manli Long was appointed as a director of our Board on April 08, 2019. She is also currently an associate professor at the Department of Foreign Language: Hubei University of Technology, a position she has held since July 2014. Ms. Manli Long has been engaged in English teaching and research for many years. During the course of her career, she won many school awards recognizing her outstanding teach ability. Ms. Manli Long received her bachelor degree in English from Hubei University of Technology in 2002 and obtained her master degree in Foreign Linguistics and Applied Linguistics from Hubei University of Technology in 2007.
Mr. Mingze Yin
Mr. Yin was appointed as a director of our Board on March 22, 2019. Mr. Mingze Yin has been the Risk Control Manager of Shanghai Guangdian Asset Management co. LTD. since November 2018. From November 2017 to October 2018, he served as the General Manager of Comprehensive Financial Services Department of the Investment Banking Division at Lianchu Securities LTD. From November 2016 to October 2017, he served as a Senior Manager of the Investment Banking Headquarter of Zhongshan Securities LTD. From July 2013 to October 2016, he served as a Senior Auditor of the BDO China SHU LUN PAN Certified Public Accountants LLP. From July 2011 to June 2013, he served as an Auditor of Zhongxi Certified Public Accountants LLP. During the term of office mentioned above, Mr. Yin received his Bachelor degree in Management in 2011 from Huaihai Institute of Technology.
Mr. Min Zhu
Mr. Zhu was appointed as a director of our board on March 22, 2019. Mr. Zhu has been the General Manager of Tianjin Longying Pictures co. LTD since October 2016. From September 2008 to September 2016, he served as a District Manager of Maersk Logistics Investment LTD. From October 2004 to September 2008, he served as a Shipping Manager of Shanghai Leya International Freight Agency Co. LTD. During the term of office mentioned above, Mr. Zhu received his Bachelor degree in System Engineering in 2002 from Shanghai Institute of Technology.
Mr. Mingyue Cai
Mr. Cai has been the Vice President at Yitu Safety Technology (Shenzhen) Co., Ltd., a PRC company engages in artificial intelligence development and application. From November 2009 to August 2017, he was an administrative director at Rugao Port Group Co., Ltd., a PRC company that focuses on port logistics, industrial park construction and timber, coal and ore trade. From June 2004 to October 2009, Mr. Cai worked as a manager at Shanghai Rishan Environmental Protection Technology Co., Ltd., a PRC company that distribute and retail environmentally friendly cleaning products. Mr. Cai has a bachelor’s degree in administrative management.
62
No Classification of Directors
In accordance with our existing charter, our board of directors is divided into two classes with only one class of directors being elected in each year and each class (except for those directors appointed prior to our first annual meeting of stockholders) serving a two-year term.
As discussed above, in connection with the Business Combination, our board of directors has been reconstituted and comprised of seven members. Our board of directors believes it is in the best interests of the Company for the board of directors to have no separate classification, such that each director serves a one-year term until the next annual meeting of stockholders or until such director’s successor is elected or qualified. If Proposal 4 is approved at the special meeting, all seven directors that our board of directors has nominated to serve on the board will serve until the first annual meeting of stockholders following the Business Combination.
Director Independence
NASDAQ listing standards require that a majority of our board of directors be independent as long as we are not a controlled company. We anticipate that a majority of our board of directors will be independent as of the closing of the Business Combination. An “independent director” is defined under the NASDAQ rules generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. We anticipate that our board of directors will determine that Mr. Mingyue Cai, Mr. Manli Long, Mr. Min Zhu and Mr. Mingze Yin are “independent directors” as defined in the NASDAQ listing standards and applicable SEC rules. Our independent directors will have regularly scheduled meetings at which only independent directors are present.
Leadership Structure and Risk Oversight
The board of directors does not have a lead independent director. Currently Mr. Yimin Jin serves as our Chief Executive Officer and Co-Chairman of the Board, Mr. Wei Xu serve as President and Co-Chairman of the Board.
Committees of the Board of Directors
The standing committees of our board of directors currently consists of an Audit Committee and a Compensation Committee, and after the Business Combination will also consist of a Nominating and Corporate Governance Committee. Each of the committees will report to the board of directors as they deem appropriate and as the board may request.
Audit Committee
Our Audit Committee currently consists of Mr. Mingze Yin, Ms. Manli Long, Mr. Min Zhu and Mr. Mingyue Cai with Mr. Mingze Yin serving as the chairman of the Audit Committee. We believe that each of these individuals qualify as independent directors according to the rules and regulations of the SEC with respect to audit committee membership. We also believe that Mr. Mingze Yin qualifies as our “audit committee financial expert,” as such term is defined in Item 401(h) of Regulation S-K. Our board of directors has adopted a written charter for the Audit Committee, which is attached as an exhibit to this Report.
The audit committee’s duties, which are specified in our Audit Committee Charter, include, but are not limited to:
| ● | reviewing and discussing with management and the independent auditor our annual audited financial statements, and recommending to the board whether the audited financial statements should be included in our Form 10-K; | |
| ● | discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements; | |
| ● | discussing with management major risk assessment and risk management policies; |
63
| ● | monitoring the independence of the independent auditor; | |
| ● | verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; | |
| ● | reviewing and approving all related-party transactions; | |
| ● | inquiring and discussing with management our compliance with applicable laws and regulations; | |
| ● | pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed; | |
| ● | appointing or replacing the independent auditor; | |
| ● | determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; | |
| ● | establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and |
Compensation Committee
Our Compensation Committee currently consists of Mr. Mingyue Cai, Ms. Manli Long, Mr. Min Zhu and Mr. Mingze Yin, with Mr. Mingyue Cai serving as the chairman of the Compensation Committee. We anticipate that each of the members of our Compensation Committee will be independent under the applicable NASDAQ listing standards. Our board of directors has adopted a written charter for the Compensation Committee, which is attached as an exhibit to this Report.
The compensation committee’s duties, which are specified in our Compensation Committee Charter, include, but not limited to:
| ● | reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer’s based on such evaluation; | |
| ● | reviewing and approving the compensation of all of our other executive officers; | |
| ● | reviewing our executive compensation policies and plans; | |
| ● | implementing and administering our incentive compensation equity-based remuneration plans; | |
| ● | assisting management in complying with our proxy statement and annual report disclosure requirements; | |
| ● | approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers and employees; | |
| ● | producing a report on executive compensation to be included in our annual proxy statement; and | |
| ● | reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors. |
Corporate Governance and Nominating Committee
Our Corporate Governance and Nominating Committee will be responsible for, among other matters: (1) identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors; (2) overseeing the organization of our board of directors to discharge the board’s duties and responsibilities properly and efficiently; (3) identifying best practices and recommending corporate governance principles; and (4) developing and recommending to our board of directors a set of corporate governance guidelines and principles applicable to us.
Our Corporate Governance and Nominating Committee currently consists of Mingyue Cai, Ms. Manli Long, Mr. Min Zhu and Mr. Mingze Yin, with Mr. Min Zhu serving as the chairman of the Corporate Governance and Nominating Committee. We anticipate that each of the members of our Corporate Governance and Nominating Committee will be independent under the applicable NASDAQ listing standards. Our board of directors has adopted a written charter for the Corporate Governance and Nominating Committee, which is available on our corporate website at www.tmsr-ltd.com.
64
Compensation Committee Interlocks and Insider Participation
None of our executive officers currently serves, and in the past year has not served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who beneficially own more than ten percent of our common stock to file reports of ownership and changes in ownership with the SEC. These reporting persons are also required to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of such Forms, we believe that during the year ended December 31, 2019 there were no delinquent filers.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our employees, including our chief executive officer, chief financial officer and principal accounting officer. Our Code of Ethics is attached as an exhibit to this Report. If we amend or grant a waiver of one or more of the provisions of our Code of Ethics, we intend to satisfy the requirements under Item 5.05 of Form 8-K regarding the disclosure of amendments to or waivers from provisions of our Code of Ethics that apply to our principal executive officer, principal financial officer and principal accounting officer by posting the required information on our website at the above address.
Item 11. Executive Compensation
The following table provides disclosure concerning all compensation paid for services to TMSR in all capacities for our fiscal years ended December 31, 2019 and 2018 provided by (i) each person serving as our principal executive officer (“PEO”), (ii) each person serving as our principal financial officer (“PFO”) and (iii) our two most highly compensated executive officers other than our PEO and PFO whose total compensation exceeded $100,000 (collectively with the PEO, referred to as the “named executive officers” in this Executive Compensation section).
Summary Compensation Table
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Other Compensation ($) | Total ($) | |||||||||||||||||||
| Yimin Jin (1) | 2019 | 100,000 | - | - | - | - | 100,000 | |||||||||||||||||||
| (CEO) | 2018 | - | - | - | - | - | - | |||||||||||||||||||
| Yi Li (2) | 2019 | 30,000 | - | - | - | - | 30,000 | |||||||||||||||||||
| (CFO) | 2018 | - | - | - | - | - | - | |||||||||||||||||||
| Xiaoyan Shen (3) | 2019 | - | - | - | - | - | - | |||||||||||||||||||
| (Former CFO) | 2018 | 36,538 | - | - | - | - | 36,538 | |||||||||||||||||||
| Jiazhen Li (4) | 2019 | - | - | - | - | - | - | |||||||||||||||||||
| (Former CEO) | 2018 | 9,135 | - | - | - | - | 9,135 | |||||||||||||||||||
| Chuanliu Ni (5) | 2019 | - | - | - | - | - | - | |||||||||||||||||||
| (Former CEO) | 2018 | 95,875 | - | - | - | - | 95,875 | |||||||||||||||||||
| (1) | Ms. Yimin Jin was appointed as the CEO of the Company on April 15, 2019. Ms. Jin is entitled to an annual base salary of $100,000 pursuant to the employment agreement he had with the Company. |
| (2) | Ms. Yi Li was appointed as the CFO of TMSR on April 25, 2019. Ms. Li was entitled to an annual base salary of $30,000 pursuant to the employment agreement she had with the Company. |
| (3) | Ms. Xioyan Shen was appointed as the CFO of TMSR on February 6, 2018. Ms. Shen was entitled to an annual base salary of $36,538 pursuant to the employment agreement she had with the Company. Ms. Shen resigned on April 15, 2019. |
| (4) | Ms. Jiazhen Li was appointed as the CEO of the Company on October 4, 2018. Ms. Li is entitled to an annual base salary of $9,135 pursuant to the employment agreement he had with the Company. Ms. Li resigned on April 15, 2019. |
| (5) | Dr. Chuanliu Ni was appointed as the CEO of the Company on February 6, 2018. Dr. Ni was entitled to an annual base salary of $127,833 pursuant to the employment agreement he had with the Company. Dr. Ni resigned on October 4, 2018. |
65
Grants of Plan Based Awards in the Fiscal Year Ended December 31, 2019
During the fiscal year ended December 31, 2019, no shares of common stock were granted to our officers and directors under the plan.
Outstanding Equity Awards at Fiscal Year-End
None.
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
We have entered into employment agreements with each of our executive officers, respectively, (each an “Employment Agreement,” collectively, the “Employment Agreements”). Under these agreements, each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a crime, or misconduct or a failure to perform agreed duties. The executive officer may resign at any time with a three-month advance written notice.
The officers also agreed to enter into additional confidential information and invention assignment agreements and are subject to certain non-compete and non-solicitation restrictions for a period one year following termination.
Director Compensation
The following table represents compensation earned by our non-executive directors in 2019.
| Name | Fees earned in cash ($) | Stock awards ($) | Option awards ($) | All other compensation ($) | Total ($) | |||||||||||||||
| Yuguo Zhang (1) | $ | 100,000 | - | - | - | $ | 100,000 | |||||||||||||
| Qihai Wang (2) | $ | 10,000 | - | - | - | $ | 14,615 | |||||||||||||
| Xueyuan Han (3) | $ | 10,000 | - | - | - | 10,000 | ||||||||||||||
| Manli Long (4) | $ | 10,000 | - | - | - | $ | 10,000 | |||||||||||||
| Mingze Yin (5) | $ | 10,000 | - | - | - | $ | 10,000 | |||||||||||||
| Min Zhu (6) | $ | 10,000 | - | - | - | $ | 10,000 | |||||||||||||
| (1) | Mr. Yuguo Zhang was appointed as a director of the Company on April 25, 2019 and shall receive annual compensation at $100,000. Yuguo Zhang resigned from his position on February 25, 2020. |
| (2) | Mr. Qihai Wang was appointed as a director of the Company on April 24, 2019 and shall receive annual compensation at $10,000. |
| (3) | Ms. Xueyuan Han was appointed as a director of the Company on April 08, 2019 and shall receive annual compensation at $10,000. Xueyuan Han resigned from his position on February 25, 2020. |
| (4) | Ms. Manli Long was appointed as a director of the Company on April 08, 2019 and shall receive annual compensation at $10,000. |
| (5) | Mr. Mingze Yin was appointed as a director of the Company on March 22, 2019 and shall receive annual compensation at $10,000. |
| (6) | Ms. Min Zhu was appointed as a director of the Company on March 22, 2019 and shall receive annual compensation at $10,000. |
66
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of our common stock as of April 17, 2020 based on information obtained from the persons named below, with respect to the beneficial ownership of shares of our common stock, by:
| ● | each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; | |
| ● | each of our executive officers and directors that beneficially owns shares of our common stock; and | |
| ● | all our executive officers and directors as a group. |
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
The percentage ownership information shown in the table below is based on that there were 28,514,520 shares of common stock outstanding as of April 17, 2020.
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class(1) | ||||||
| Directors and Named Executive Officers | ||||||||
| Yimin Jin, Chief Executive Officer and Co-Chairman of the Board | 4,334,705 | 15.20 | % | |||||
| Wei Xu, Co-Chairman of the Board | 3,755,000 | 12.17 | % | |||||
| Yuguo Zhang, President | 805,000 | 2.82 | % | |||||
| Yi Li, Chief Financial Officer | 0 | - | ||||||
| Bibo Lin, Vice President | 1,200,000 | 4.21 | % | |||||
| Xiaonian Zhang, Vice President | 0 | - | ||||||
| Qihai Wang, Director | 1,036,000 | 3.63 | % | |||||
| Mingyue Cai, Director | 0 | - | ||||||
| Manli Long, Director | 0 | - | ||||||
| Mingze Yin, Director | 0 | - | ||||||
| Min Zhu, Director | 0 | - | ||||||
| All officers and directors as a group (11 persons): | 11,130,705 | 39.04 | % | |||||
| 5% Beneficial Owner | ||||||||
| None | - | - | ||||||
| (1) | Unless otherwise noted, the business address of each of the following entities or individuals is 180 Qingnian West Road, Hongqiao Building West, 4th Floor, Nantong, Jinagsu, China 226001. |
Changes in Control
N/A
67
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Except for the employment agreements previously entered into between us and certain of our named executive officers, since January 1, 2018, none of our directors or named executive officers, nor any person who owned of record or was known to own beneficially more than 5% of the outstanding Shares of our common stock, nor any associate or affiliate of such persons or companies, has any material interest, direct or indirect, in any transaction, or in any proposed transaction, which has materially affected or will affect us.
Director Independence
NASDAQ listing standards require that a majority of our board of directors be independent. An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that Ms. Manli Long, Mr. Mingze Yin, Mr. Mingyue Cai and Mr. Min Zhu are “independent directors” as defined in the NASDAQ listing standards and applicable SEC rules. Our independent directors have regularly scheduled meetings at which only independent directors are present.
Item 14. Principal Accountant Fees and Services.
WWC, P.C., (“WWC”) was appointed by the Company to serve as its independent registered public accounting firm for fiscal years ended December 31, 2019 and 2018. During the period from April 10, 2018 to October 26, 2018, Friedman, LLP served as the independent registered public accounting firm of the Company. The following is a summary of fees paid or to be paid to WWC or Friedman, LLP for services rendered.
Audit Fees. Audit fees consist of fees billed for professional services rendered for the audit of our year-end financial statements and services that are normally provided by Friedman in connection with regulatory filings. The aggregate fees billed by Friedman, LLP for professional services rendered for the audit of our annual financial statements, review of the financial information included in our Forms 10-Q for the respective periods and other required filings with the SEC for the years ended December 31, 2019 and 2018 totaled $0 and $240,000, respectively. The aggregate fees billed or to be billed by WWC for professional services rendered for the audit of our annual financial statements, review of the financial information included in our Forms 10-Q for the respective periods and other required filings with the SEC for the years ended December 31, 2019 and 2018 totaled $250,000 and $240,000, respectively. The above amounts include interim procedures and audit fees, as well as attendance at audit committee meetings.
Audit-Related Fees. Audit-related services consist of fees billed for assurance and related services that are reasonably related to performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards. During the year ended December 31, 2019, we did not pay WWC or Friedman, LLP for consultations concerning financial accounting and reporting standards.
Tax Fees. We paid WWC $5,000 for preparation of our 2018 US Income Tax Returns in 2019. We did not pay Friedman, LLP for tax planning and tax advice for the year ended December 31, 2019 and 2018.
All Other Fees. We did not pay WWC or Friedman, LLP for other services for the year ended December 31, 2019 and 2018.
Pre-Approval Policy
Our audit committee was formed upon the consummation of our initial public offering. As a result, the audit committee did not pre-approve all of the foregoing services, although any services rendered prior to the formation of our audit committee were approved by our board of directors. Since the formation of our audit committee, and on a going-forward basis, the audit committee has and will pre-approve all auditing services and permitted non-audit services to be performed for us by our auditors, including the fees and terms thereof (subject to the de minimis exceptions for non-audit services described in the Exchange Act which are approved by the audit committee prior to the completion of the audit).
68
Item 15. Exhibits, Financial Statement Schedules
| (a) | The following documents are filed as part of this Report: |
| (1) | Financial Statements |
| (2) | Financial Statements Schedule |
All financial statement schedules are omitted because they are not applicable or the amounts are immaterial and not required, or the required information is presented in the financial statements and notes thereto in is Item 15 of Part IV below.
| (3) | Exhibits |
We hereby file as part of this Report the exhibits listed in the attached Exhibit Index. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the SEC, 100 F Street, N.E., Room 1580, Washington D.C. 20549. Copies of such material can also be obtained from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates or on the SEC website at www.sec.gov.
EXHIBIT INDEX
| * | Filed herewith |
| ** | Furnished herewith |
| (1) | Incorporated by reference to the Company’s Form 8-K, filed with the Commission on June 26, 2018. |
| (2) | Incorporated by reference to the Company’s Form S-1, filed with the Commission on June 16, 2015. |
| (3) | Incorporated by reference to the Company’s Form 8-K, filed with the Commission on March 25, 2019. |
| (4) | Incorporated by reference to the Company’s Form 8-K, filed with the Commission on April 8, 2019. |
| (5) | Incorporated by reference to the Company’s Form 8-K, filed with the Commission on April 15, 2019. |
| (6) | Incorporated by reference to the Company’s Form 8-K, filed with the Commission on April 26, 2019. |
| (7) | Incorporated by reference to the Company’s Form 8-K, filed with the Commission on December 26, 2019. |
| (8) | Incorporated by reference to the Company’s Form 8-K, filed with the Commission on January 3, 2020. |
| (9) | Incorporated by reference to the Company’s Form 8-K, filed with the Commission on February 26, 2020. |
69
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To: | The Board of Directors and Stockholders of | |
| TMSR Holding Company Limited |
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TMSR Holding Company Limited (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity, and cash flows for the two year period ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the two year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
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.
| /s/ WWC, P.C. | |
| WWC, P.C. | |
| Certified Public Accountants | |
| We have served as the Company’s auditor since October 26, 2018 | |
| San Mateo, California | |
| April 17, 2020 | |
F-2
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 2,483,938 | $ | 89,270 | ||||
| Notes receivable | 43,003 | - | ||||||
| Accounts receivable, net | 2,197,264 | 3,083,291 | ||||||
| Other receivables, net | 52,616 | 216,284 | ||||||
| Inventories | 1,197,065 | 1,367,021 | ||||||
| Prepayments | 4,069,214 | 1,644,368 | ||||||
| Discontinued operations - current assets | 1,543,806 | 3,259,383 | ||||||
| Total current assets | 11,586,906 | 9,659,617 | ||||||
| PLANT AND EQUIPMENT, NET | 19,057 | 27,693 | ||||||
| RIGHT-OF-USE ASSETS | 90,250 | - | ||||||
| OTHER ASSETS | ||||||||
| Goodwill | 7,289,454 | 7,392,992 | ||||||
| Other assets | - | 97,020 | ||||||
| Deferred tax assets | 37,532 | 118,020 | ||||||
| Discontinued operations – non-current assets | 3,424,390 | 15,557,635 | ||||||
| Total other assets | 10,751,376 | 23,165,667 | ||||||
| Total assets | $ | 22,447,589 | $ | 32,852,977 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short term loans - bank | $ | - | $ | 508,832 | ||||
| Third party loan | - | 144,841 | ||||||
| Accounts payable | 344,108 | 821,291 | ||||||
| Other payables and accrued liabilities | 4,121,862 | 1,794,300 | ||||||
| Other payables - related parties | 1,336,902 | 2,752,108 | ||||||
| Customer deposits | 146,771 | - | ||||||
| Lease liabilities - current | 61,009 | - | ||||||
| Taxes payable | 202 | 12,534 | ||||||
| Discontinued operations - current liabilities | 10,174,066 | 7,309,887 | ||||||
| Total current liabilities | 16,184,920 | 13,343,793 | ||||||
| OTHER LIABILITIES | ||||||||
| Lease liabilities – non-current | 61,580 | - | ||||||
| Discontinued operations – non-current liabilities | 239,097 | 145,381 | ||||||
| Total other liabilities | 300,677 | 145,381 | ||||||
| Total liabilities | 16,485,597 | 13,489,174 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, $0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of December 31, 2019 and 2018, respectively | - | |||||||
| Common stock, $0.0001 par value, 200,000,000 shares authorized, 20,821,661 and 19,895,935 shares issued and outstanding as of December 31, 2019 and 2018, respectively* | 2,082 | 1,990 | ||||||
| Additional paid-in capital | 8,350,861 | 4,814,846 | ||||||
| Statutory reserves | - | - | ||||||
| (Accumulated deficit) retained earnings | (1,558,683 | ) | 15,267,660 | |||||
| Accumulated other comprehensive (loss) income | (832,268 | ) | (720,693 | ) | ||||
| Total shareholders’ equity | 5,961,992 | 19,363,803 | ||||||
| Total liabilities and shareholders’ equity | $ | 22,447,589 | $ | 32,852,977 | ||||
* Giving retroactive effect to the 2 for 1 split effected on June 20, 2018
The accompanying notes are an integral part of these consolidated financial statements.
F-3
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| REVENUES | ||||||||
| Equipment and systems | $ | - | $ | - | ||||
| Fuel materials | 18,955,988 | 1,106,923 | ||||||
| Trading and others | 628,489 | 346,153 | ||||||
| TOTAL REVENUES | 19,584,477 | 1,453,076 | ||||||
| COST OF REVENUES | ||||||||
| Equipment and systems | - | - | ||||||
| Fuel materials | 18,699,429 | 1,075,215 | ||||||
| Trading and others | 322,813 | 43,956 | ||||||
| TOTAL COST OF REVENUES | 19,022,242 | 1,119,171 | ||||||
| GROSS PROFIT | 562,235 | 333,905 | ||||||
| OPERATING EXPENSES (INCOME) | ||||||||
| Selling, general and administrative | 1,170,617 | 747,823 | ||||||
| (Recovery of) provision for doubtful accounts | (318,979 | ) | - | |||||
| TOTAL OPERATING EXPENSES | 851,638 | 747,823 | ||||||
| LOSS FROM OPERATIONS | (289,403 | ) | (413,918 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest income | 2,022 | 95 | ||||||
| Interest expense | (23,251 | ) | (16,992 | ) | ||||
| Investment income | 1,023 | - | ||||||
| Other income (expense), net | 24,126 | 30,019 | ||||||
| Total other (expense), net | 3,920 | 13,122 | ||||||
| LOSS BEFORE INCOME TAXES FROM CONTINUING OPERATIONS | (285,484 | ) | (400,796 | ) | ||||
| PROVISION FOR INCOME TAXES | 128,799 | 4,328 | ||||||
| LOSS FROM CONTINUING OPERATIONS | (414,283 | ) | (405,124 | ) | ||||
| Discontinued operations: | ||||||||
| (Loss) income from discontinued operations, net of taxes | (16,412,060 | ) | 1,855,116 | |||||
| Net (loss) income | (16,826,343 | ) | 1,449,992 | |||||
| OTHER COMPREHENSIVE LOSS | ||||||||
| Foreign currency translation adjustment | (111,574 | ) | (2,322,191 | ) | ||||
| COMPREHENSIVE LOSS | $ | (16,937,917 | ) | $ | (872,199 | ) | ||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES | ||||||||
| Basic and diluted* | 21,212,735 | 23,349,524 | ||||||
| Earnings per share from continuing operations | ||||||||
| Basic and diluted | (0.02 | ) | (0.02 | ) | ||||
| Earnings per share from discontinued operations | (0.77 | ) | 0.08 | |||||
| Basic and diluted | ||||||||
| Earnings per share available to common shareholders | ||||||||
| Basic and diluted* | $ | (0.79 | ) | $ | 0.06 | |||
* Giving retroactive effect to the 2 for 1 split effected on June 20, 2018
The accompanying notes are an integral part of these consolidated financial statements.
F-4
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Additional | Retained earnings | Accumulated other comprehensive | ||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | paid-in | Statutory | income | ||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares* | Par Value | capital | reserves | Unrestricted | (loss) | Total | ||||||||||||||||||||||||||||
| BALANCE, December 31, 2017 | - | - | 17,990,856 | 1,799 | 10,591,492 | 2,137,815 | 13,817,668 | 701,217 | 27,249,991 | |||||||||||||||||||||||||||
| Reverse capitalization | - | - | 4,758,774 | 476 | 7,453,773 | - | - | - | 7,454,249 | |||||||||||||||||||||||||||
| Issuance of common stock for cash | - | - | 26,693 | 3 | 133,332 | - | - | - | 133,335 | |||||||||||||||||||||||||||
| Acquisition of Wuhan HOST Coating Materials Co. Ltd. | - | - | 1,012,932 | 101 | 4,699,899 | - | - | - | 4,700,000 | |||||||||||||||||||||||||||
| Acquisition of Jiangsu Rong Hai Electric Power Fuel Co. Ltd. | - | - | 4,630,000 | 463 | 9,259,537 | - | - | - | 9,7260,000 | |||||||||||||||||||||||||||
| Disposition of Hubei Shengrong Environmental Protections and Energy Saving Technology Co. Ltd. | - | - | (8,523,320 | ) | (852 | ) | (27,323,187 | ) | (2,137,815 | ) | - | 900,281 | (28,561,573 | ) | ||||||||||||||||||||||
| Net income | - | - | - | - | - | - | 1,449,992 | 1,449,992 | ||||||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | - | (2,322,191 | ) | (2,322,191 | ) | ||||||||||||||||||||||||||
| BALANCE, December 31, 2018 | - | $ | - | 19,895,935 | $ | 1,990 | $ | 4,814,846 | $ | - | $ | 15,267,660 | $ | (720,693 | ) | $ | 19,363,803 | |||||||||||||||||||
| Net loss | - | - | - | - | - | - | (16,826,343 | ) | - | (16,826,343 | ) | |||||||||||||||||||||||||
| Conversion of warrants into common stock | - | - | 106,903 | 11 | (11 | ) | - | - | - | - | ||||||||||||||||||||||||||
| Issuance of common stock for debt settlement | - | - | 131,330 | 13 | 261,334 | - | - | - | 261,347 | |||||||||||||||||||||||||||
| Issuance of common stock for debt settlement | - | - | 142,530 | 14 | 290,747 | - | - | - | 290,761 | |||||||||||||||||||||||||||
| Issuance of common stock for cash | - | - | 1,492,000 | 149 | 2,983,850 | - | - | - | 2,983,999 | |||||||||||||||||||||||||||
| The cancellation of the common stock | - | - | (947,037 | ) | (95 | ) | 95 | - | - | - | - | |||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | - | - | (111,574 | ) | (111,574 | ) | |||||||||||||||||||||||||
| BALANCE, December 31, 2019 | - | $ | - | 20,821,661 | 2,082 | 8,350,861 | - | (1,558,683 | ) | (832,267 | ) | 5,961,993 | ||||||||||||||||||||||||
* Giving retroactive effect to the 2 for 1 split effected on June 20, 2018
The accompanying notes are an integral part of these consolidated financial statements.
F-5
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | (16,826,343 | ) | $ | 1,449,992 | |||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Write down of assets in discontinued operations | 13,380,258 | - | ||||||
| Goodwill impairments of discontinued operations | 3,424,390 | - | ||||||
| Depreciation of plant and equipment | 93,055 | 377,064 | ||||||
| Amortization of intangible assets | 20,895 | 294,643 | ||||||
| (Recovery of) provision for doubtful accounts | - | (608,864 | ) | |||||
| Deferred tax provision (benefit) | 79,745 | 92,534 | ||||||
| Loss on deconsolidation of subsidiaries | - | 14,874 | ||||||
| Change in operating assets and liabilities | ||||||||
| Notes receivable | (43,499 | ) | (258,305 | ) | ||||
| Accounts receivables | 852,562 | (1,588,078 | ) | |||||
| Accounts receivable - related party | 4,618,601 | |||||||
| Other receivables | 174,874 | (103,539 | ) | |||||
| Other receivable - related party | 358,699 | |||||||
| Inventories | 152,549 | 3,250,208 | ||||||
| Prepayments | (2,486,469 | ) | (14,044,148 | ) | ||||
| Deferred revenue | - | 39,022 | ||||||
| Accounts payable | (471,047 | ) | 80,155 | |||||
| Other payables and accrued liabilities | 2,240,609 | 778,420 | ||||||
| Customer deposits | 148,463 | 430,981 | ||||||
| Lease liabilities | 32,711 | - | ||||||
| Taxes payable | (12,295 | ) | 2,779,502 | |||||
| Net cash used in operating activities | 759,457 | (2,038,239 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash (disposed from deconsolidation) received from acquisition of TJComex International Group Corp. | - | (9,690 | ) | |||||
| Cash received from JM Global Holding Company through reverse capitalization | - | 7,989,402 | ||||||
| Cash payment for acquisition of Wuhan HOST Coating Materials Co. Ltd., net | - | (6,235,363 | ) | |||||
| Cash received from acquisition of Rong Hai Electric Power Fuel Co. Ltd. | - | 753,752 | ||||||
| Cash deconsolidated from disposal of Hubei Shengrong Environmental Protections and Energy Saving Technology Co. Ltd. | - | (49,866 | ) | |||||
| Purchase of equipment | - | (3,515 | ) | |||||
| Net cash provided by investing activities | - | 2,444,720 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock | 2,984,094 | 133,335 | ||||||
| Proceeds from short-term loans - bank | - | 2,265,790 | ||||||
| Repayments of short-term loans - bank | (507,489 | ) | (2,265,790 | ) | ||||
| Proceeds from third party loan | - | 19,740 | ||||||
| Repayments of other payable - related parties | - | (205,249 | ) | |||||
| Net cash provided by (used in) financing activities | 2,476,605 | (52,174 | ) | |||||
| EFFECT OF EXCHANGE RATE ON CASH | 64,945 | (89,453 | ) | |||||
| INCREASE IN CASH | 3,301,007 | 264,854 | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 726,737 | 461,883 | ||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 4,027,744 | $ | 726,737 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for income tax | $ | 40,771 | $ | 210,733 | ||||
| Cash paid for interest | $ | 23,251 | $ | 167,207 | ||||
| NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES | ||||||||
| Reverse capitalization with JM Global Holding Company | $ | - | $ | 7,454,249 | ||||
| Issuance of common stock for the acquisition of Wuhan HOST Coating Materials Co. Ltd. | $ | - | $ | 4,700,000 | ||||
| Issuance of common stock for the acquisition of Jiangsu Rong Hai Electric Power Fuel Co. Ltd. | $ | - | $ | 9,260,000 | ||||
| Cancellation of common stock for the disposition of Hubei Shengrong Environmental Protections and Energy Saving Technology Co. Ltd. | $ | - | $ | 28,561,573 | ||||
| Issuance of common stock for warrants conversion | 11 | - | ||||||
| Issuance of common stock for debts settlement | 552,108 | - | ||||||
| The cancellation of the common stock | - | - | ||||||
| Initial recognition of right-of-use assets and lease liabilities | 316,923 | - | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of business and organization
TMSR Holding Company Limited (the “Company” or “TMSR”), formerly known as JM Global Holding Company (“JM Global”), was a blank check company incorporated in Delaware on April 10, 2015. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets (“Business Combination”). On June 20, 2018, TMSR completed a reincorporation and as a result, the Company changed its state of incorporation from Delaware to Nevada. The Articles of Incorporation and Bylaws of TMSR Nevada became the governing instruments of the Company, resulting in a 2-for-1 forward stock split of the Company’s common stock (the “Forward Split). The Reincorporation and Forward Split were approved by shareholders holding the majority of the outstanding shares of common stock of TMSR Delaware on June 1, 2018 at the Annual Meeting of Shareholders.
On February 6, 2018, China Sunlong Environmental Technology Inc. (“China Sunlong”) consummated the business combination (the “Business Combination”) with JM Global pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”) dated as of August 28, 2017 by and among (i) JM Global; (ii) Zhong Hui Holding Limited; (iii) China Sunlong; (iv) each of the shareholders of China Sunlong named on Annex I of the Share Exchange Agreement (the “Sellers”); and (v) Chuanliu Ni, a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, in the capacity as the representative for the Sellers. Pursuant to the Share Exchange Agreement, JM Global acquired from the Sellers all of the issued and outstanding equity interests of China Sunlong in exchange for 17,990,856 newly-issued shares of common stock of JM Global to the Sellers. 1,799,088 of these newly-issued shares are held in escrow for 18 months from the closing date of the Business Combination as a security for China Sunlong and the Sellers’ indemnification obligations under the Share Exchange Agreement. This transaction is accounted for as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the shareholders of China Sunlong owns the majority of the outstanding shares of JM Global immediately following the completion of the transaction and JM Global’s operations was the operations of China Sunlong following the transaction. Accordingly, China Sunlong was deemed to be the accounting acquirer in the transaction and the transaction was treated as a recapitalization of China Sunlong. The financial statements of China Sunlong prior to February 6, 2018 are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented in the accompanying consolidated financial statements of JM Global.
China Sunlong is a holding company incorporated on August 31, 2015, under the laws of the Cayman Islands. China Sunlong has no substantive operations other than holding all of the outstanding share capital of Shengrong Environmental Protection Holding Company Limited (“Shengrong BVI”). Shengrong BVI is a holding company incorporated on June 30, 2015, under the laws of the British Virgin Islands. Shengrong BVI has no substantive operations other than holding all of the outstanding share capital of Hong Kong Shengrong Environmental Technology Limited (“Shengrong HK”). Shengrong HK is also a holding company holding all of the outstanding equity of Shengrong Environmental Protection Technology (Wuhan) Co., Ltd. (“Shengrong WFOE”).
The Company focuses on the industrial solid waste recycling and comprehensive utilization. The Company’s main products are high efficiency permanent magnetic separators and comprehensive utilization systems for industrial solid wastes. The Company’s headquarter is located in Hubei Province, in the People’s Republic of China (the “PRC” or “China”). All of the Company’s business activities are carried out by the wholly owned operating Chinese company, Hubei Shengrong Environmental Protection Energy-Saving Science and Technology Ltd. (“Hubei Shengrong”) prior to May 1, 2018.
On April 11, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries (collectively “Purchasers”), entered into a Share Purchase Agreement (the “Purchase Agreement”) with Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd. (collectively “Sellers” ) and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a company incorporated in China engaging in the research, development, production and sale of coating materials. Pursuant to the Purchase Agreement, the Purchasers acquired all of the outstanding equity interests of Wuhan Host (the “Acquisition”). In exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total Consideration”), of which $5.2 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $6.0 million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”). The Parties agree the Share Consideration shall be an aggregate of 1,293,104 shares of common stock of which is based on the closing price of US$4.64 on March 27, 2018. The Share Consideration shall be issued in three equal installments, which shall be subject to lock-up of 12, 24 and 36 months, respectively. The Purchase Agreement contains representations, warranties and covenants customary for acquisitions of this type. The Acquisition closed on May 1, 2018. Starting on May 1, 2018, the Company’s business activities added the research, development, production and sale of coating materials.
F-7
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 16, 2018, The Purchasers and the Sellers entered into a supplement agreement (“Supplement Agreement”), which modified the terms of consideration set forth in the Purchase Agreement entered between Purchasers and Sellers on April 11, 2018. Pursuant to the Supplement Agreement, in exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total Consideration”), of which $6.5 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $4.7 million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”). In the Supplement Agreement, both Purchasers and Sellers also agreed to delete the section 3.3 of the Share Purchase Agreement, a section that stipulates the Share Consideration shall be issued in three equal installments.
On March 31, 2017, China Sunlong completed its acquisition of 100% of the equity in TJComex International Group Corporation (“TJComex BVI”). At the closing of such acquisition, the selling shareholders of TJComex BVI received 5,935 shares (“Payment Shares”) of China Sunlong Common Stock valued at $926.71 per share for 100% of their equity in TJComex BVI. TJComex BVI owns 100% of the issued and outstanding capital stock of TJComex Hong Kong Company Limited (“TJComex HK”), a Hong Kong limited liability company, which owns 100% equity interest of Tianjin Corro Technological Consulting Co., Ltd. (“TJComex WFOE”), a wholly foreign owned enterprise incorporated under the laws of the PRC. Pursuant to certain contractual arrangements, TJComex WFOE controls Tianjin Commodity Exchange Co., Ltd. (“TJComex Tianjin”), a limited liability company incorporated under the law of the PRC. TJComex Tianjin is engaged in general merchandise trading business and related consulting services, and its headquarter is located in the city of Tianjin, PRC.
On April 2, 2018, the Company disposed of its subsidiary, TJComex BVI in consideration of (i) its minimum contribution to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI business and the rest of the Company’s business. The Company’s decision to dispose of TJComex BVI is to (i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity of the Company’s business, (iii) focus the Company’s resources on the solid waste recycling business as well as developing environmental control business opportunities; and (iv) make it possible for the Company to pursue acquisition opportunities for more compatible businesses. TJComex BVI was disposed to Chuanliu Ni, a Chinese citizen who is the director of China Sunlong.
As of April 2, 2018, the net assets of TJComex BVI were $16,598 and is being recorded as a loss from disposal of subsidiary in the consolidated financial statements for the period ending December 31, 2018. As TJComex operating revenue was less than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for TJComex were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.
On October 10, 2017, Hubei Shengrong established a wholly owned subsidiary, Fujian Shengrong Environmental Protection Energy-Saving Science and Technology Ltd. (“Fujian Shengrong”), with registered capital of RMB 10,000,000 (approximately USD 1,518,120). Fujian Shengrong has no operations prior to May 30, 2018. On May 30, 2018, Hubei Shengrong and two unrelated entities entered into certain Capital Transfer and Contribution Agreement pursuant to which these two entities shall contribute cash of approximately USD 5.0 million (RMB 32.0 million) into Fujian Shengrong and Hubei Shengrong shall contribute approximately USD 1.3 million (RMB 8.0 million) which is the consideration for certain technology consulting services to be provided by Hubei Shengrong to the two entities. Upon completion of the contribution, the total registered capital of Fujian Shengrong increased to RMB 40.0 million (approximately USD 6.3 million) and Hubai Shengrong owns 20% and the two entities collectively own 80% of the equity interest of Fujian Shengrong. In August, 2018, Hubei Shengrong transferred 20% equity interest of Fujian Shengrong to Shengrong WFOE. The Company will account for the investment in Fujian Shengrong using the cost method. Since Shengrong WFOE did not provide any cash contribution to Fujian Shengrong or technology services, the investment balance under the cost method investment on December 31, 2018 is $0.
On November 30, 2018, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong Huang and Qihai Wang (collectively “Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the Purchase Agreement, TMSR shall issue an aggregate of 4,630,000 shares of TMSR’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”) with Shengrong WFOE, through which Shengrong WFOE shall have the right to control, manage and operate Rong Hai in return for a service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are designed to provide Shengrong WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in China. The Acquisition closed on November 30, 2018. Starting on November 30, 2018, the Company’s business activities added coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap, of which business activities are carried out in Nantong, Jiang Su Province, PRC.
F-8
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 27, 2018, the Company, entered into an Equity Purchase Agreement (the “EPA”) with Hopeway International Enterprises Limited., a private limited company duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”). Pursuant to the EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the “Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA is hereby referred as Disposition. The Company’s decision to dispose of Hubei Shengrong is due to the planning mandates of Wuhan Municipal Government 2018 which manufactures should move away from city’s downtown area. Therefore, due to the policy change, Hubei Shengrong is forced to close the existing facility, relocate and build a new facility, which is expected to take approximately 7-8 years. As a result, Hubei Shengrong will not be able to keep the production running and will generate no income in the foreseeable future. Management believed it is very difficult, if possible at all, to continue manufacturing of solid waste recycling systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while retaining the research and development and sale of solid waste recycling systems business. Upon closing of the Disposition, the Purchaser will become the sole shareholder of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except the research and development team and intellectual property rights in connection with the solid waste recycling systems business shall be assigned to Shengrong WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the sale of solid waste recycling systems business and the processed industrial waste materials trading business, this restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations for Hubei Shengrong were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.
The accompanying consolidated financial statements reflect the activities of TMSR and each of the following entities:
| Name | Background | Ownership | ||||
| China Sunlong | ● | A Cayman Islands company | 100% owned by the Company | |||
| Shengrong BVI |
● ● |
A British Virgin Island company Incorporated on June 30, 2015 |
100% owned by China Sunlong | |||
| Shengrong HK |
● ● |
A Hong Kong company Incorporated on September 25, 2015 |
100% owned by Shengrong BVI | |||
| Shengrong WFOE | ● | A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”) | 100% owned by Shengrong HK | |||
| ● | Incorporated on March 1, 2016 | |||||
| ● | Registered capital of USD 12,946 (HKD100,000), fully funded | |||||
| ● | Purchase and sales of high efficiency permanent magnetic separator and comprehensive utilization system | |||||
| ● | Trading of processed industrial waste materials | |||||
| Hubei Shengrong2 | ● | A PRC limited liability company | 100% owned by Shengrong WFOE | |||
| ● | Incorporated on January 14, 2009 | |||||
| ● | Registered capital of USD 4,417,800 (RMB 30,000,000), fully funded | |||||
| ● | Production and sales of high efficiency permanent magnetic separator and comprehensive utilization system. | |||||
| ● | Trading of processed industrial waste materials | |||||
| Wuhan HOST | ● | A PRC limited liability company | 100% owned by Shengrong WFOE | |||
| ● | Incorporated on October 27, 2010 | |||||
| ● | Registered capital of USD 750,075 (RMB 5,000,000), fully funded | |||||
| ● | Research, development, production and sale of coating materials. |
F-9
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Shanghai Host Coating | ● | A PRC limited liability company | 80% owned by Wuhan HOST | |||
| Materials Co., Ltd. | ● | Incorporated on December 11, 2014 | ||||
| (“Shanghai HOST”) | ● | Registered capital of USD 3,184,371 (RMB 20,000,000), to be fully funded by November 2024 | ||||
| ● | No operations and no capital contribution has been made as of December 31, 2018 | 90% owned by Wuhan HOST | ||||
| Wuhan HOST Coating | ● | A PRC limited liability company | ||||
| Materials Xiaogan | ● | Incorporated on December 25, 2018 | ||||
| Co., Ltd. (“Xiaogan HOST”) | ● | Registered capital of USD 11,595,379 (RMB 80,000,000), to be fully funded by December 2028 | ||||
| ● | No operations and no capital contribution has been made as of December 31, 2018 | |||||
| Jiangsu Rong Hai | ● | A PRC limited liability company | VIE of Shengrong WFOE | |||
| Electric Power Fuel | ● | Incorporated on May 20, 2009 | ||||
| Co., Ltd. (“Rong Hai”) | ● | Registered capital of USD 3,171,655 (RMB 20,180,000), fully funded | ||||
| ● | Coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap | |||||
| TJComex BVI1 | ● | A British Virgin Island company | 100% owned by China Sunlong | |||
| ● | Incorporated on March 8, 2016 | |||||
| TJComex HK1 | ● | A Hong Kong company | 100% owned by TJComex BVI | |||
| ● | Incorporated on March 19, 2014 | |||||
| TJComex WFOE1 | ● | A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”) | 100% owned by TJComex HK | |||
| ● | Incorporated on March 10, 2004 | |||||
| ● | Registered capital of USD 200,000 | |||||
| TJComex Tianjin1 | ● | A PRC limited liability company | 100% owned by TJComex WFOE | |||
| ● | Incorporated on November 19, 2007 | |||||
| ● | Registered capital of USD 7,809,165 (RMB 55,000,000) | |||||
| ● | General merchandise trading business and related consulting services |
| 1 | Disposed on April 2, 2018 |
| 2 | Disposed on December 27, 2018 |
F-10
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual Arrangements
Rong Hai is controlled through contractual agreements in lieu of direct equity ownership by the Company or any of its subsidiaries. Such contractual arrangements consist of a series of five agreements, consulting services agreement, equity pledge agreement, call option agreement, voting rights proxy agreement, and operating agreement (collectively the “Contractual Arrangements”, which were signed on November 30, 2018).
Material terms of each of the Rong Hai VIE Agreements are described below:
Consulting Services Agreement
Pursuant to the consulting services agreement between Rong Hai and Shengrong WFOE dated November 30, 2018, Shengrong WFOE has the exclusive right to provide consulting services to Rong Hai relating to Rong Hai’s business, including but not limited to business consulting services, human resources development, and business development. Shengrong WFOE exclusively owns any intellectual property rights arising from the performance of this agreement. Shengrong WFOE has the right to determine the service fees based on Rong Hai’s actual operation on a quarterly basis.
This consulting services agreement shall take effect on the date of execution of this consulting services agreement and this consulting services agreement shall be in full force and effective until Rong Hai’s valid operation term expires. Shengrong WFOE may, at its discretion, decide to renew or terminate this consulting services agreement.
Equity Pledge Agreement.
Under the equity pledge agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, the shareholders pledged all of their equity interests in Rong Hai to Shengrong WFOE to guarantee Rong Hai’s performance of relevant obligations and indebtedness under the consulting services agreement. In addition, the shareholders of Rong Hai have completed the registration of the equity pledge under the agreement with the competent local authority. If Rong Hai breaches its obligation under the consulting services agreement, Shengrong WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests.
This equity pledge agreement shall take effect on the date of execution of this equity pledge agreement and this equity pledge agreement shall be in full force and effective until Rong Hai and Shengrong WFOE’s satisfaction of all contractual obligations and settlement of all secured indebtedness. Upon Shengrong WFOE’s request, Rong Hai shall extend its operation period to sustain the effectiveness of this equity pledge agreement.
Call Option Agreement
Under the call option agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, each of the shareholders of Rong Hai irrevocably granted to WFOE or its designee an option to purchase at any time, to the extent permitted under PRC law, all or a portion of his equity interests in Rong Hai. Also, Shengrong WFOE or its designee has the right to acquire any and all of its assets of Rong Hai. Without Shengrong WFOE’s prior written consent, Rong Hai’s shareholders cannot transfer their equity interests in Rong Hai, and Rong Hai cannot transfer its assets. The acquisition price for the shares or assets will be the minimum amount of consideration permitted under the PRC law at the time of the exercise of the option.
This call option agreement shall take effect on the date of execution of this call option agreement. Rong Hai and Shengrong WFOE shall not terminate this call option agreement under any circumstances for any reason unless it is early terminated by Shengrong WFOE or by the requirements under the applicable laws. This call option agreement shall be terminated provided that all equity interest or assets under this option is transferred to Shengrong WFOE or its designee.
Voting Rights Proxy Agreement
Under the voting rights proxy agreement among Shengrong WFOE and the shareholders of Rong Hai dated November 30, 2018, each shareholder of Rong Hai irrevocably appointed Shengrong WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of his equity interests in Rong Hai, including but limited to the power to vote on its behalf on all matters of Rong Hai requiring shareholder approval in accordance with the articles of association of Rong Hai.
The voting rights proxy agreement shall take effect on the date of execution of this voting rights proxy agreement and remain in effect indefinitely for the maximum period of time permitted by law in consideration of Shengrong WFOE.
F-11
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Agreement
Pursuant to the operating agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, Rong Hai and the shareholders of Rong Hai agreed not to enter into any transaction that could materially affect Rong Hai’s assets, obligations, rights or operations without prior written consent from Shengrong WFOE, including but not limited to the amendment of the articles of association of Rong Hai. Rong Hai and its shareholders agree to accept and follow our corporate policies provided by Shengrong WFOE in connection with Rong Hai’s daily operations, financial management and the employment and dismissal of Rong Hai’s employees. Rong Hai agreed that it should seek guarantee from Shengrong WFOE first if any guarantee is needed for Rong Hai’s performance of any contract or loan in the course of its business operation.
This operating agreement shall take effect on the date of execution of this operating agreement and this operating agreement shall be in full force and effective until Rong Hai’s valid operation term expires. Either party of Shengrong WFOE and Rong Hai shall complete approval or registration procedures for the extension of its business term three months prior to the expiration of its business term, for the purpose of the maintenance of the effectiveness of this operating agreement.
All the Rong Hai VIE Agreements became effective immediately upon their execution.
On January 3, 2020, the Company entered into a Share Purchase Agreement (“SPA”) with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) and all the shareholders of Wuge (“Wuge Shareholders”). Wuge Shareholders are Wei Xu, Bibo Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network Technology Co., Ltd., which is controlled by Wei Xu. The financial statements of Wuge are not presented in this annual report; however they will be filed on a separate Form 8-K by the Company upon completion of financial due diligence and audit of Wuge’s financial statements.
The Company’s Board of Directors determined that the certain operating subsidiaries, namely, Wuhan Host, and Shengrong WFOE have been designated as discontinued operations. The Company’s board intends to sell these businesses based on their values as continuing going concerns. The Company’s assets and liabilities on its consolidated balance sheets at December 31, 2019 and 2018 and its statements of operations for the years ended December 31, 2019 and 2018 have been grouped and re-grouped based on this designation.
Note 2 – Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).
Principles of consolidation
The consolidated financial statements of the Company include the accounts of TMSR and its wholly owned subsidiaries and VIE. All intercompany transactions and balances are eliminated upon consolidation.
Use of estimates and assumptions
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s consolidated financial statements include the useful lives of intangible assets, revenues, deferred revenues and plant and equipment, impairment of long-lived assets, collectability of receivables, inventory valuation allowance, and realization of deferred tax assets. Actual results could differ from these estimates.
Foreign currency translation and transaction
The reporting currency of the Company is the U.S. dollar. The Company in China conducts its businesses in the local currency, Renminbi (RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. The results of operations are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments included in accumulated other comprehensive income (loss) amounted to $ (832,267) and $(720,693) as of December 31, 2019 and 2018, respectively. The balance sheet amounts, with the exception of shareholders’ equity at December 31, 2019 and 2018 were translated at 6.98 RMB and 6.88 RMB to $1.00, respectively. The shareholders’ equity accounts were stated at their historical rate. The average translation rates applied to statement of income accounts for the years ended December 31, 2019 and 2018 were 6.90 RMB and 6.62 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.
F-12
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
Accounts receivable, net
Accounts receivable include trade accounts due from customers. An allowance for doubtful accounts may be established and recorded based on management’s assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories are comprised of raw materials and work in progress and are stated at the lower of cost or net realizable value using the first-in-first-out method in Shengrong WFOE and weighted average method in Wuhan HOST and Rong Hai. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually and recognize an impairment charge against the inventory when the carrying value exceeds net realizable value. As of December 31, 2019 and 2018, no obsolescence and cost in excess of net realizable value were recognized.
Prepayments
Prepayments are funds deposited or advanced to outside vendors for future inventory or services purchases. As a standard practice in China, many of the Company’s vendors require a partial or full payment prior to production and shipment of finished goods This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method after consideration of the estimated useful lives of the assets and estimated residual value. The estimated useful lives and residual value are as follows:
| Useful Life | Estimated Residual Value | |||||
| Building | 5 – 20 years | 5 | % | |||
| Office equipment and furnishing | 5 years | 5 | % | |||
| Production equipment | 3-10 years | 5 | % | |||
| Automobile | 5 years | 5 | % | |||
| Leasehold improvements | Shorter of the remaining lease terms or estimated useful lives | 0 | % | |||
The cost and related accumulated depreciation and amortization of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of income and comprehensive income. Expenditures for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
F-13
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets
Intangible assets represent land use rights, patents, and software system, and they are stated at cost, less accumulated amortization. Research and development costs associated with internally developed patents are expensed when incurred. Amortization expense is recognized on the straight-line basis over the estimated useful lives of the assets. All land in the PRC is owned by the government; however, the government grants “land use rights.” The Company has obtained the rights to use various parcels of land and the right to use SAP B1 Cloud system. The patents have finite useful lives and are amortized using a straight-line method that reflects the estimated pattern in which the economic benefits of the intangible asset are to be consumed. The Company amortizes the cost of the land use rights, patents, and software system over their useful life using the straight-line method. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The estimated useful lives are as follows:
| Useful Life | ||||
| Land use rights | 50 years | |||
| Patents | 10 - 20 years | |||
| Software | 5 years | |||
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 income. Impairment losses on goodwill are not reversed. As of December 31, 2018, no impairment of goodwill was recognized. In 2019, the Company recorded approximately $3.42 million in impairment to its Wuhan Host and Shengrong WFOE operating units. The entities were located at the epicenter of the COVID 19 virus. Accordingly, those entities were materially adversely impacted.
Impairment for long-lived assets
Long-lived assets, including plant, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of December 31, 2018, no impairment of long-lived assets was recognized. In 2019, the Company recognized approximately $4.89 million in impairment to long lived assets related to Wuhan Host and Shengrong WFOE.
Fair value measurement
The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities, customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
| ● |
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
| |
| ● |
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
| |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
F-14
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Customer deposits
In Shengrong WFOE, customer deposits represent amounts advanced by customers on product orders. Generally, the Company requires 3% to 10% advanced deposits from the customers upon the signing of the sales contracts. At various stages of the sales contract execution, the Company generally collects certain amounts of advanced deposits from the customers based on the approximate amount of cash flows needed at each stage. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s revenue recognition policy.
In Wuhan HOST, customer deposits represent amounts advanced by customers on product orders. Generally, the Company requires 95% to 100% advanced deposits from the customers upon signing of the sales contracts. A few customers with good credit history are not required to make any deposit. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s revenue recognition policy.
Revenue recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue, other than retainage revenues, was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the Company’s retainage revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.
The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are primarily recognized at a point in time except for the retainage revenues where the retainage periods are recognized over the retainage period, usually is a period of twelve months.
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition except its retainage revenues.
An entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but does not control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is entitled to retain in the exchange.
F-15
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from equipment and systems, revenue from coating and fuel materials, and revenue from trading and others are recognized at the date of goods delivered and title passed to customers, when a formal arrangement exists, the price is fixed or determinable, the Company has no other significant obligations and collectability is reasonably assured. Such revenues are recognized at a point in time after all performance obligations are satisfied under the new five-step model. In addition, training service revenues are recognized when the services are rendered and the Company has no other obligations, and collectability is reasonably assured. These revenues are recognized at a point in time.
Prior to January 1, 2018, the Company allowed its customers to retain 5% to 10% of the contract price as warranty retainage during the retainage period of 12 months to guarantee product quality. Retainage is considered as a payment term included as a part of the contract price, and was recognized as revenue upon the shipment of products. Due to nature of the retainage, the Company’s policy is to record revenue the full value of the contract without VAT, including any retainage, since the Company has experienced insignificant warranty retainage claims historically. Due to the infrequent and insignificant amount of warranty retainage claims, the ability to collect retainage was reasonably assured and was recognized at the time of shipment. On January 1, 2018, upon the adoption of ASU 2014-09 (ASC 606), revenues from product warranty retainage are recognized over the retainage period over 12 months. For the year ended December 31, 2019, less than 5% of our retainage revenues were recognized in our consolidated revenues and included in the Company’s equipment and systems revenues in the accompanying statements of income and comprehensive income.
Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
The Company’s disaggregate revenue streams are summarized as follows:
| For the Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues – Equipment and systems | $ | - | $ | - | ||||
| Revenues – Fuel materials | 18,955,988 | 1,106,923 | ||||||
| Revenues – Trading and others | 628,489 | 346,153 | ||||||
| Total revenues | $ | 19,584,477 | $ | 1,453,076 | ||||
Gross versus Net Revenue Reporting
Starting from July 2016, in the normal course of the Company’s trading of industrial waste materials business, the Company directly purchases the processed industrial waste materials from the Company’s suppliers under the Company’s specifications and drop ships the materials directly to the Company’s customers. The Company would inspect the materials at its customers’ site, during which inspection it temporarily assumes legal title to the materials, and after which inspection legal title is transferred to its customers. In these situations, the Company generally collects the sales proceed directly from the Company’s customers and pay for the inventory purchases to the Company’s suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the new accounting guidance for principal-agent considerations. Since the Company is the primary obligor and is responsible for (i) fulfilling the processed industrial waste materials delivery, (ii) controlling the inventory by temporarily assume legal title to the materials after inspecting the products from our vendors before passing the materials to our customers, and (iii) bearing the back-end risk of inventory loss with respect to any product return from the Company’s customers, the Company has concluded that it is the principal in these arrangements, and therefore report revenues and cost of revenues on a gross basis.
Research and Development (“R&D”) Expenses
Research and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in the selling, general and administrative expenses and totaled $0 and $261,022 for the years ended December 31, 2019 and 2018, respectively.
Income taxes
The Company accounts for income taxes in accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
F-16
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred taxes are accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized, or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company incurred no such penalties and interest for the years ended December 31, 2019 and 2018. As of December 31, 2019, the Company’s PRC tax returns filed for 2016, 2017 and 2018 remain subject to examination by any applicable tax authorities.
Earnings per share
Basic earnings per share are computed by dividing income available to common shareholders of the Company by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares. 9,079,348 and 10,500,000 of outstanding warrants which is equivalent to convertible of 4,539,674 and 5,250,000 common shares were excluded from the diluted earnings per share calculation due to its anti-dilutive effect for the year ended December 31, 2019 and 2018, respectively. 824,000 of outstanding options were excluded from the diluted earnings per share calculation due to its anti-dilutive effect for the year ended December 31, 2019 and 2018.
Recently issued accounting pronouncements
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
F-17
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Business combination and restructuring
TJ Comex BVI
On April 2, 2018, the Company disposed of its subsidiary, TJComex BVI, in consideration of (i) its minimum contribution to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI business and the rest of the Company’s business. The Company’s decision to dispose TJComex BVI is to (i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity of the Company’s business, (iii) focus the Company’s resources on the solid waste recycling business as well as developing environmental control business opportunities; and (iv) make it possible for the Company to pursue acquisition opportunities for more compatible business. TJComex BVI was disposed to Chuanliu Ni, a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, for no consideration.
As of April 2, 2018, the net assets of TJComex BVI were $16,598 and will be recorded as a loss from disposal of subsidiary in the consolidated financial statements for the year ended December 31, 2018. As TJComex operating revenue was less than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for TJComex were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.
Wuhan HOST
On April 11, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries (collectively “Purchasers”), entered into a Share Purchase Agreement (the “Purchase Agreement”) with Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd. (collectively “Sellers” ) and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a company incorporated in China engaging in the research, development, production and sale of coating materials. Pursuant to the Purchase Agreement, the Purchasers acquired all of the outstanding equity interests of Wuhan Host (the “Acquisition”). In exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total Consideration”), of which $ 5.2 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $6.0 million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”). The Parties agree the Share Consideration shall be an aggregate of 1,293,104 shares of common stock of which is based on the closing price of US$4.64 on March 27, 2018. The Share Consideration shall be issued in three equal installments, which shall be subject to lock-up of 12, 24 and 36 months, respectively. The Purchase Agreement contains representations, warranties and covenants customary for acquisitions of this type. The Acquisition closed on May 1, 2018.
On August 16, 2018, The Purchasers and the Sellers entered into a supplement agreement (“Supplement Agreement”), which modified the terms of consideration set forth in the Purchase Agreement entered between Purchasers and Sellers on April 11, 2018. Pursuant to the Supplement Agreement, in exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total Consideration”), of which $6.5 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $4.7 million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”). In the Supplement Agreement, both Purchasers and Sellers also agreed to delete the section 3.3 of the Share Purchase Agreement, a section that stipulates the Share Consideration shall be issued in three equal installments.
The Company’s acquisition of Wuhan HOST was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Wuhan HOST based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Other current assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.
F-18
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition of Wuhan HOST based on a valuation performed by an independent valuation firm engaged by the Company:
| Total consideration at fair value | $ | 11,200,000 |
| Fair Value | ||||
| Cash | $ | 276,626 | ||
| Other current assets | 6,763,767 | |||
| Plant and equipment | 6,499,268 | |||
| Other noncurrent assets | 2,139,987 | |||
| Goodwill | 7,544,008 | |||
| Total asset | 23,223,656 | |||
| Total liabilities | (12,023,656 | ) | ||
| Net asset acquired | $ | 11,200,000 | ||
Approximately $7.5 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of the Company and Wuhan HOST. None of the goodwill is expected to be deductible for income tax purposes.
The Company’s Board of Directors has determined that it will discontinue Wuhan Host, and identify a buyer for the Wuhan Host in 2020. The Company recognized an impairment charge of approximately $3.42 million.
Rong Hai
On November 30, 2018, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong Huang and Qihai Wang (collectively “Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the SPA, TMSR shall issue an aggregate of 4,630,000 shares of TMSR’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”) with Shengrong WFOE, through which Shengrong WFOE shall have the right to control, manage and operate Rong Hai in return for a service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in China. The Acquisition closed on November 30, 2018.
The Company’s acquisition of Rong Hai was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Rong Hai based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Other current assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.
F-19
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition of Rong Hai based on a valuation performed by an independent valuation firm engaged by the Company:
| Total consideration at fair value | $ | 9,260,000 |
| Fair Value | ||||
| Cash | $ | 717,056 | ||
| Other current assets | 5,980,230 | |||
| Plant and equipment | 28,875 | |||
| Other noncurrent assets | 116,655 | |||
| Goodwill | 7,307,470 | |||
| Total asset | 14,150,286 | |||
| Total liabilities | (4,890,286 | ) | ||
| Net asset acquired | $ | 9,260,000 | ||
Approximately $7.3 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of the Company and Rong Hai. None of the goodwill is expected to be deductible for income tax purposes.
For the years ended December 31, 2018, the impact of the acquisition of Rong Hai to the consolidated statements of income and comprehensive income was not material.
The Company did not record an impairment of goodwill for the year ended December 31, 2019.
Hubei Shengrong
On December 27, 2018, the Company, entered into an Equity Purchase Agreement (the “EPA”) with Hopeway International Enterprises Limited., a private limited company duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”). Pursuant to the EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the “Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA is hereby referred as Disposition. The Company’s decision to dispose of Hubei Shengrong is due to the planning mandates of Wuhan Municipal Government 2018 which manufactures should move away from city’s downtown area. Therefore, due to the policy change, Hubei Shengrong is forced to close the existing facility, relocate and build a new facility, which is expected to take approximately 7-8 years. As a result, Hubei Shengrong will not be able to keep the production running and will generate no income in the foreseeable future. Management believed it is very difficult, if possible at all, to continue manufacturing of solid waste recycling systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while retaining the research and development and sale of solid waste recycling systems business. Upon closing of the Disposition, the Purchaser will become the sole shareholder of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except the research and development team and intellectual property rights in connection with the solid waste recycling systems business shall be assigned to Shengrong WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the sale of solid waste recycling systems business and the processed industrial waste materials trading business, the results of operations for Hubei Shengrong were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.
Hopeway is jointly owned by Ms. Jiazhen Li, the Company’s chief executive officer, and Mr. Xiaonian Zhang, the Company’s president and director. As Hopeway is a related party under common control with the Company under Ms. Li and Mr. Zhang, no gain or loss are recognized in this disposition and the net consideration of the transaction are recognized as addition to capital as opposed to a gain. Total fair value of the consideration of the cancelled 8,523,320 shares of common stock was determined by using the average closing stock price of the Company held by Hopeway during the period from February 6, 2018 to December 27, 2018 at $3.56 per share.
Subsequent to the disposal of Hubei Shengrong, management expects to conduct business with Hubei Shengrong. Hubei Shengrong will supply products and services to the Company. Any transactions in the next operating period between the Company and Hubei Shengrong will be reported as related party transactions, and such transactions should not be considered arm’s lengths transactions.
F-20
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 27, 2018, the net assets of Hubei Shengrong and reconciliation of reduction of capital are as follows:
| December 27, 2018 | ||||
| CURRENT ASSETS | ||||
| Cash and cash equivalents | $ | 47,994 | ||
| Accounts receivable, net | 9,410,436 | |||
| Accounts receivable - related party, net | 761,794 | |||
| Other receivables | 48,718 | |||
| Other receivable - related party | 2,158 | |||
| Inventories | 5,332,990 | |||
| Prepayments | 31,793,810 | |||
| Total current assets | 47,397,900 | |||
| PLANT AND EQUIPMENT, NET | 203,992 | |||
| OTHER ASSETS | ||||
| Other assets | 7,269 | |||
| Deferred tax assets | 780,550 | |||
| Total other assets | 787,819 | |||
| Total assets | $ | 48,389,711 | ||
| CURRENT LIABILITIES | ||||
| Short term loans - bank | $ | 2,180,708 | ||
| Accounts payable | 95,854 | |||
| Other payables and accrued liabilities | 156,498 | |||
| Other payables - related parties | 507,183 | |||
| Customer deposits | 347,853 | |||
| Taxes payable | 16,602,841 | |||
| Total current liabilities | 19,890,937 | |||
| OTHER LIABILITIES | ||||
| Deferred rent liabilities | 30,763 | |||
| Total other liabilities | 30,763 | |||
| Total liabilities | $ | 19,921,700 | ||
| Total net assets | $ | 28,468,011 | ||
| Total consideration | (30,362,135 | ) | ||
| Currency translation adjustment | 900,281 | |||
| Total addition to paid-in-capital | $ | 993,843 | ||
Note 4 – Variable interest entity
On November 30, 2018, Shengrong WFOE entered into Contractual Arrangements with Rong Hai and its shareholders upon executing of the “Purchase Agreement”. The significant terms of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the Company classifies Rong Hai as VIE.
F-21
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Shengrong WFOE is deemed to have a controlling financial interest and be the primary beneficiary of Rong Hai because it has both of the following characteristics:
(1) The power to direct activities at Rong Hai that most significantly impact such entity’s economic performance, and
(2) The obligation to absorb losses of, and the right to receive benefits from Hong Hai that could potentially be significant to such entity.
Accordingly, the accounts of Rong Hai are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s consolidated financial statements beginning on November 30, 2018.
The carrying amount of the VIE’s assets and liabilities are as follows:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Current assets | $ | 8,687,451 | $ | 6,321,261 | ||||
| Property, plants and equipment | 19,057 | 27,693 | ||||||
| Other noncurrent assets | 127,782 | 118,020 | ||||||
| Goodwill | 7,289,454 | 7,392,991 | ||||||
| Total assets | 16,123,744 | 13,859,965 | ||||||
| Current liabilities | 6,067,264 | 4,188,340 | ||||||
| Non-current liabilities | 61,580 | - | ||||||
| Total liabilities | 6,128,844 | 4,188,340 | ||||||
| Net assets | $ | 9,994,900 | $ | 9,671,625 | ||||
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Short-term loan | $ | - | $ | 508,832 | ||||
| Accounts payable | 619,329 | 821,289 | ||||||
| Other payables and accrued liabilities | 301,230 | 559,984 | ||||||
| Other payables – related party | 5,082,068 | 2,285,701 | ||||||
| Tax payables | 202 | 12,534 | ||||||
| Customer Advances | 3,426 | |||||||
| Lease liabilities | 61,009 | - | ||||||
| Total current liabilities | 6,067,264 | 4,188,340 | ||||||
| Lease liabilities - noncurrent | 61,580 | - | ||||||
| Total liabilities | $ | 6,128,844 | $ | 4,188,340 | ||||
The summarized operating results of the VIE’s are as follows:
| For the year ended December 31, | ||||
| 2019 | ||||
| Operating revenues | $ | 19,584,477 | ||
| Gross profit | 564,145 | |||
| Income from operations | 592,808 | |||
| Net income | $ | 464,009 | ||
F-22
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Accounts receivable and accounts receivable – related party
Accounts receivable consist of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Accounts receivable | $ | 2,221,319 | $ | 4,924,092 | ||||
| Less: Allowance for doubtful accounts | (24,055 | ) | (732,846 | ) | ||||
| Total accounts receivable, net | $ | 2,197,264 | $ | 4,191,246 | ||||
Movement of allowance for doubtful accounts is as follows:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Beginning balance | $ | - | $ | 6,674,834 | ||||
| Beginning balance from Wuhan HOST | 260,764 | 218,152 | ||||||
| Beginning balance from Rong Hai | 472,082 | 469,000 | ||||||
| Depositing ending balance of Hubei Shengrong | - | (5,203,666 | ) | |||||
| Addition | - | 411,261 | ||||||
| Recovery and reversals | (708,791 | ) | (1,020,125 | ) | ||||
| Exchange rate effect | - | (816,610 | ) | |||||
| Ending balance | $ | (24,055 | ) | $ | 732,846 | |||
Note 6 – Inventories
Inventories consist of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Raw materials | $ | - | $ | 1,965,175 | ||||
| Work in progress | - | 258 | ||||||
| Finished goods | 1,197,065 | - | ||||||
| Total inventories | $ | 1,197,065 | $ | 1,965,433 | ||||
The Company did not recognize any write downs on inventory from continuing operations during the years ended December 31, 2019 and 2018.
Note 7 – Plant and equipment, net
Plant and equipment consist of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Office equipment and furniture | 39,688 | 43,220 | ||||||
| Automobile | 209,057 | 209,057 | ||||||
| Subtotal | 248,745 | 252,277 | ||||||
| Less: accumulated depreciation and amortization | (229,688 | ) | (224,584 | ) | ||||
| Total | $ | 19,057 | $ | 27,693 | ||||
Depreciation and amortization expense for the years ended December 31, 2019 and 2018 amounted to $8,345 and $1,578, respectively.
F-23
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Goodwill
The changes in the carrying amount of goodwill by business units are as follows:
| Wuhan HOST | Rong Hai | Total | ||||||||||
| Balance as of December 31, 2018 | $ | 6,946,059 | $ | 7,392,991 | $ | 14,339,050 | ||||||
| Goodwill impairments | (3,424,390 | ) | (3,424,390 | ) | ||||||||
| Foreign currency translation adjustment | (97,278 | ) | (103,537 | ) | (200,815 | ) | ||||||
| Balance as of December 31, 2019 | $ | 3,424,390 | $ | 7,289,454 | $ | 10,713,844 | ||||||
Note 9 – Related party balances and transactions
Related party balances
| a. | Other receivable – related party: |
| Name of related party | Relationship | December 31, 2019 | December 31, 2018 | |||||||
| Xiaonian Zhang | Shareholder of the Company | $ | - | $ | 40,707 | |||||
The Company advanced funds to the related party for daily operating purposes.
| b. | Other payables – related parties: |
| Name of related party | Relationship | December 31, 2019 | December 31, 2018 | |||||||
| Jiazhen Li | CEO, Former Co-Chairman | $ | - | $ | 11,232 | |||||
| Chuanliu Ni | Former Co-Chairman | 325,907 | 325,907 | |||||||
| Zhong Hui Holding Limited | Shareholder of the Company | 140,500 | 140,500 | |||||||
| Chunyong Zheng | Spouse of shareholder of the Company | - | 2,543,651 | |||||||
| Long Liao | Shareholder of the Company | - | 72,690 | |||||||
| Wuhan Modern | Under common control of shareholder of the Company | - | 712,605 | |||||||
| Qihai Wang | Shareholder of the Company | 166,673 | 1,941,957 | |||||||
| Jirong Huang | Spouse of shareholder of the Company | - | 77,197 | |||||||
| Jiangsu Longying Education Technology Co. LTD | A company in which shareholder hold shares | 422,868 | ||||||||
| Yongzheng Wang | Son of shareholder of the Company | - | 23,808 | |||||||
| Nantong Ronghai Logistics Co., Ltd. | Under common control of shareholder of the Company | - | 242,739 | |||||||
| Jiangsu Longhai Film Culture Media Co. Ltd | Under common control of shareholder of the Company | 280,954 | ||||||||
| Total | $ | 1,336,902 | $ | 6,092,286 | ||||||
The above payables represent interest free loans and advances. These loans and advances are unsecured and due on demand.
Note 10 – Debt
Short term loan
Short term loan due to bank is as follows:
| Short term loans | Maturities | Weighted average interest rate | Collateral/Guarantee | December 31, 2019 | December 31, 2018 | |||||||||||||
| Loan from Bank of Jiangsu | September 25, 2019 | 6.31 | % | Guaranteed by Qihai Wang’s personal property | $ | - | 508,832 | |||||||||||
F-24
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Third party loan
In January 2018, the Company obtained an unsecured loan from an unrelated third party in the amount of $144,841 (RMB 1,000,000) due on August 21, 2020 with no interest. On March 11, 2019, the Board granted an aggregate of 72,785 shares of restricted common stock, with a fair value of $144,841, determined using the closing price of $1.99 on March 11, 2019, to repay the debt the Company owed to this unrelated third party.
Interest expense for the years ended December 31, 2019 and 2018 amounted to $23,251 and $16,992, respectively.
Note 11 – Taxes
Income tax
United States
TMSR was organized in the state of Delaware in April 2015 and re-incorporated in the state of Nevada in June 2018. TMSR’s U.S. net operating loss for the year ended December 31, 2019 amounted to approximately $33,000. As of December 31, 2019, TMSR’s net operating loss carry forward for United States income taxes was approximately $17,000. The net operating loss carry forwards are available to reduce future years’ taxable income through year 2038. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management reviews this valuation allowance periodically and makes changes accordingly.
On December 22, 2017, the “Tax Cuts and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States. Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21%. The 2017 Tax Act imposed a global intangible low-taxed income tax (“GILTI”), which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. The Company determined that there are no impact of GILTI for the year ended December 31, 2019 and 2018, which the Company believes that it will be imposed a minimum tax rate of 10.5% and to the extent foreign tax credits are available to reduce its US corporate tax, which may result in no additional US federal income tax being due.
Cayman Islands
China Sunlong is incorporated in the Cayman Islands and are not subject to tax on income or capital gains under current Cayman Islands law. In addition, upon payments of dividends by China Sunlong to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Shengrong BVI and TJComex BVI are incorporated in the British Virgin Islands and are not subject to tax on income or capital gains under current British Virgin Islands law. In addition, upon payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
Shengrong HK and TJComex HK are incorporated in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law, Shengrong HK and TJComex HK are exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.
F-25
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRC
Shengrong WFOE, Hubei Shengrong, Wuhan HOST and Rong Hai are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises are subject to income tax at a rate of 25% after appropriate tax adjustments.
Significant components of the provision for income taxes are as follows:
| For the year ended December 31, 2019 | For the year ended December 31, 2018 | |||||||
| Current | $ | 49,054 | $ | 608,355 | ||||
| Deferred | 79,745 | (92,535 | ) | |||||
| Total provision for income taxes | $ | 128,799 | $ | 515,820 | ||||
Under the Income Tax Laws of the PRC, companies are subject to income tax at a rate of 25%. However, Wuhan Host also obtained the “high-tech enterprise” tax status in 2016, which reduced its statutory income tax rate to 15% from 2016 to 2019. Tax savings resulted from the reduced statutory income tax rate amounted to $0 and $276,519 for the years ended December 31, 2019 and 2018, respectively. Tax savings resulted from the reduced statutory income tax rate that increased the Company’s earnings per share by $0.00 and $0.01 for the years ended December 31, 2019 and 2018, respectively.
Deferred tax assets
Bad debt allowances must be approved by the Chinese tax authority prior to being deducted as an expense item on the tax return.
Significant components of deferred tax assets were as follows:
| December 31, 2019 | December 31, 2018 | |||||||
| Net operating losses carried forward – U.S. | $ | 17,309 | $ | 10,396 | ||||
| Net operating losses carried forward – PRC | - | - | ||||||
| Bad debt allowance | 37,532 | 205,863 | ||||||
| Valuation allowance | (17,309 | ) | (10,396 | ) | ||||
| Deferred tax assets, net | $ | 37,532 | $ | 205,863 | ||||
Value added tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC laws. The value added tax (“VAT”) standard rates are 6% to 17% of the gross sales price and changed to 6% to 16% of gross sales starting in May 2018. The VAT standard rates changed to 6% to 13% of the gross sales prices starting in April 2019. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished products and services.
Taxes payable consisted of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| VAT taxes payable | $ | - | $ | 24,436 | ||||
| Income taxes payable | - | 13,114 | ||||||
| Other taxes payable | 202 | 18,199 | ||||||
| Total | $ | 202 | $ | 55,749 | ||||
F-26
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the package of practical expedients that does not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. The impact of the adoption on January 1, 2019 increased the right-of-uses and lease liabilities by approximately $298,000.
The Company had an office lease agreement with a 5-year lease term starting in December 2016 until December 2021 and another office lease agreement with a 5-year lease term starting in January 2018 until January 2023. Upon adoption of ASU 2016-02, the Company recognized lease labilities of approximately $298,000, with corresponding Right-of-use (“ROU”) assets of the same amount based on the present value of the future minimum rental payments of the new lease, using an effective interest rate of 4.75%, which is determined using an incremental borrowing rate.
The weighted average remaining lease term of its existing leases is 3.22 years.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For the year ended December 31, 2019 and 2018, rent expenses amounted to $ 32,711 and $152,734, respectively.
The five-year maturity of the Company’s lease obligations is presented below:
| Twelve months ended December, 31 | Operating lease amount | |||
| 2020 | $ | 40,423 | ||
| 2021 | 32,339 | |||
| 2022 | 32,339 | |||
| 2023 | 24,254 | |||
| Total lease payments | 129,355 | |||
| Less: interest | (6,766 | ) | ||
| Present value of lease liabilities | $ | 122,589 | ||
Note 13 – Concentration of risk
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. As of December 31, 2019 and 2018, no cash were deposited with various financial institutions located in the U.S. As of December 31, 2019 and 2018, $4,003,554 and $680,709 and were deposited with various financial institutions located in the PRC, respectively. As of December 31, 2019 and 2018, $354 and $7,823 were deposited with one financial institution located in Hong Kong, respectively. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Customer and vendor concentration risk
For the year ended December 31, 2019, three customers accounted for 35.3%, 23.7% and 14.4% of the Company’s revenues. For the year ended December 31, 2018, two customers accounted for 34.3% and 22.0% of the Company’s revenues.
As of December 31, 2019, two customers accounted for 77.0% and 21.9% of the Company’s accounts receivable. December 31, 2018, two customers accounted for 41.1% and 13.4% of the Company’s accounts receivable.
For the year ended December 31, 2019, four suppliers accounted for 23.2%, 11.9%, 11.4% and 11.1% of the Company’s total purchases. For the year ended December 31, 2018, one supplier accounted for 57.7% of the Company’s total purchases.
As of December 31, 2019, two suppliers accounted for 70.2% and 11.5% of the Company’s total prepayments; and four suppliers accounted for 45.5%, 25.0%, 16.4% and 13.1% of the Company’s total accounts payable. As of December 31, 2018, three suppliers accounted for 44.2%, 15.5% and 13.9% of the Company’s total prepayments; and four suppliers accounted for 27.4%, 26.5%, 12.5% and 11.9% of the Company’s total accounts payable.
F-27
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Equity
Restricted net assets
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by Shengrong WFOE only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the accompanying consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Shengrong WFOE.
Shengrong WFOE, Wuhan HOST, Rong Hai are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, Shengrong WFOE may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. Wuhan HOST and Rong Hai may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by State Administration of Foreign Exchange.
As of December 31, 2019, Shengrong WFOE, Wuhan HOST, and Rong Hai, collectively attributed $0 of retained earnings for their statutory reserves as they have accumulated losses.
As a result of the foregoing restrictions, Shengrong WFOE, Wuhan Host and Rong Hai are restricted in their ability to transfer their net assets to the Company. Foreign exchange and other regulation in the PRC may further restrict Shengrong WFOE, Wuhan Host and Rong Hai from transferring funds to China Sunlong in the form of dividends, loans and advances. As of December 31, 2019 and 2018, amounts restricted are the net assets of Shengrong WFOE, Wuhan Host and Rong Hai which amounted to $(7,263,520) and $2,347,967, respectively.
Stock split
On June 1, 2018, the Company’s shareholder approved a 2 for 1 stock split of the Company’s common stock at the Annual Meeting of Shareholders. The stock split was effected on June 20, 2018, pursuant to the completion of the reincorporation from Delaware to Nevada. All shares and per share amounts used herein and in the accompanying consolidated financial statements have been retroactively restated to reflect the stock split.
Common stock
On June 23, 2018, the Company issued an aggregate of 26,693 shares of the Company’s common stock, par value $0.0001 per share, to certain non-U.S. purchasers at a purchase price of $5.00 per share for an aggregate proceeds of $133,335 pursuant to certain securities purchase agreement dated April 20, 2018 and June 22, 2018. The issuances were pursuant to the exemption from registration under Regulation S promulgated under the Securities Act of 1933, as amended.
On February 12, 2019, the Company’s warrant holders converted 294,971 of the Company’s warrants into 52,077 shares of the Company’s common stock using cashless exercises method.
On February 20, 2019, the Company’s warrant holders converted 415,355 of the Company’s warrants into 54,826 shares of the Company’s common stock using cashless exercises method.
On March 11, 2019, the Board granted an aggregate of 131,330 shares of restricted common stock, with a fair value of $261,347, determined using the closing price of $1.99 on March 11, 2019, to repay the debt the Company owed to two unrelated third parties. As the carrying value of the debt equaled to the fair value of the 131,330 common shares at $1.99 per share, no gain or loss were recognized upon this debt settlement.
On March 15, 2019, the Board granted an aggregate of 142,530 shares of restricted common stock, with a fair value of $290,761, determined using the closing price of $2.04 on March 15, 2019, to repay the debt the Company owed to one unrelated third party. As the carrying value of the debt equaled to the fair value of the 142,530 common shares at $2.04 per share, no gain or loss were recognized upon this debt settlement.
On April 4, 2019, the Company entered into certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as amended pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per share, at a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million.
On November 20,2019, the company wrote off 947,037 common shares.
F-28
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants and options
On July 29, 2015, the Company sold 10,000,000 units at a purchase price of $5.00 per unit (“Public Units”) in its initial public offering. Each Public Unit consists of one share of the Company’s common stock, $0.0001 par value, and one warrant. Each warrant will entitle the holder to purchase one-half of one share of common stock at an exercise price of $2.88 per half share ($5.75 per whole share). Warrants may be exercised only for a whole number of shares of common stock. No fractional shares will be issued upon exercise of the warrants. The warrants will become exercisable on 30 days after the consummation of its initial Business Combination with China Sunlong on February 6, 2018. The warrants will expire February 5, 2023. The warrants will be redeemable by the Company at a price of $0.01 per warrant upon 30 days prior written notice after the warrants become exercisable, only in the event that the last sale price of the common stock equals or exceeds $12.00 per share for any 20 trading days within a 30-trading day period ending on the third business day prior to the date on which notice of redemption is given.
The sponsor of the Company purchased, simultaneously with the closing of the Public Offering on July 29, 2015, 500,000 units at $5.00 per unit in a private placement for an aggregate price of $2,500,000. Each unit purchased is substantially identical to the units sold in the Public Offering.
The Company sold to the underwriter (and/or its designees), for $100, as additional compensation, an option to purchase up to a total of 800,000 units exercisable at $5.00 per unit (or an aggregate exercise price of $4,000,000) upon the closing of the Public Offering. Since the option is not exercisable until the earliest on the closing the initial Business Combination, the option will effectively represent the right to purchase up to 800,000 shares of common stock and 800,000 warrants to purchase 400,000 shares at $5.75 per full share for an aggregate maximum amount of $6,300,000. The units issuable upon exercise of this option are identical to those issued in the Public Offering.
In July 2016, the board of directors of the Company appointed two new directors. In August 2016, the sponsor of the Company granted an option to each of the two new directors to acquire 12,000 shares of common stock at a price of $4.90 per share vested immediately and exercisable commencing six months after closing of the initial Business Combination and expiring five years from the closing of the initial Business Combination.
The aforementioned warrants and options are deemed to be effective on February 6, 2018, the date of the consummation of its initial business combination with China Sunlong, as the Company was deemed to be the accounting acquiree in the transaction and the transaction was treated as a recapitalization of China Sunlong.
The summary of warrant activity is as follows:
| Weighted | Average | |||||||||||||||
| Average | Remaining | |||||||||||||||
| Warrants Outstanding | Exercisable Shares | Exercise Price | Contractual Life | |||||||||||||
| December 31, 2018 | 10,500,000 | 5,250,000 | $ | 5.75 | 4.41 | |||||||||||
| Granted/Acquired | - | - | $ | - | - | |||||||||||
| Forfeited | - | - | $ | - | - | |||||||||||
| Exercised | (1,420,652 | ) | (710,326 | ) | $ | - | - | |||||||||
| December 31, 2019 | 9,079,348 | 4,539,674 | $ | 5.75 | 3.14 | |||||||||||
The summary of option activity is as follows:
| Weighted | Average | |||||||||||
| Average | Remaining | |||||||||||
| Options Outstanding | Exercise Price | Contractual Life | ||||||||||
| December 31, 2018 | 824,000 | $ | 5.00 | 4.41 | ||||||||
| Granted/Acquired | - | $ | - | - | ||||||||
| Forfeited | - | $ | - | - | ||||||||
| Exercised | - | $ | - | - | ||||||||
| December 31, 2019 | 824,000 | $ | 5.00 | 4.16 | ||||||||
F-29
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Commitments and contingencies
Contingencies
The Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.
On February 27, 2013, Wuhan HOST entered into a contract to purchase land use rights for a parcel of land in E Zhou City, Hubei, China, for $1,212,478. The Company has paid to the local government $781,349, a balance of $431,129 has not been paid; however, the government has already issued to the Company all the necessary certificates transferring title of the land use rights for the parcel of land to the Company, and has not taken action to collect any remaining unpaid balance. If the government determines that it wishes to collect an unpaid balance, the total cost to the Company would be $431,129.
Note 16 – Segment reporting
The Company follows ASC 280, Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance. The Company’s chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income from operations.
The Company’s has discontinued Wuhan Host and Shengrong WFOE. The Company’s remain business segment and operations is JS Ronghai. The Company’s consolidated results of operations and consolidated financial position from continuing operations are almost all attributable to JS Ronghai; accordingly, management believes that the consolidated balance sheets and statement of operations provide the relevant information to assess JS Ronghai’s performance.
The following represents assets by division as of:
| Total assets as of | December 31, 2019 | December 31, 2018 | ||||||
| Hubei Shengrong and Shengrong WFOE | $ | - | $ | - | ||||
| Wuhan HOST | - | - | ||||||
| Rong Hai and Tongrong WFOE | 17,407,872 | 13,956,986 | ||||||
| TJComex Tianjin | - | - | ||||||
| TMSR, China Sunlong, Shengrong BVI and Shengrong HK | 71,521 | 78,973 | ||||||
| Total Assets | $ | 17,479,393 | $ | 14,035,959 | ||||
F-30
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Discontinued Operations
The following depicts the financial position and result of operations for the discounted operations of Wuhan Host and Shengrong WOFE as of and the year ended December 31, 2019 and the financial position and result of operations for the discounted operations of Wuhan Host, Sheng WOFE, Hubei Shengrong as of and for the year ended December 31, 2018.
| December 31, | December 31, | |||||||
| Financial Position | 2019 | 2018 | ||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | 1,543,806 | 637,467 | ||||||
| Notes receivable | - | 251,513 | ||||||
| Accounts receivable, net | - | 1,107,955 | ||||||
| Other receivables, net | - | 49,549 | ||||||
| Other receivable - related party | - | 40,707 | ||||||
| Inventories | - | 598,412 | ||||||
| Prepayments | - | 573,780 | ||||||
| Total current assets | 1,543,806 | 3,259,383 | ||||||
| PLANT AND EQUIPMENT, NET | - | 5,733,639 | ||||||
| OTHER ASSETS | ||||||||
| Goodwill | 3,424,390 | 6,946,059 | ||||||
| Intangible assets, net | - | 2,790,095 | ||||||
| Deferred tax assets | - | 87,843 | ||||||
| Total other assets | 3,424,390 | 9,823,997 | ||||||
| Total assets | 4,968,196 | 15,557,635 | ||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | 2,288,195 | 627,332 | ||||||
| Other payables and accrued liabilities | 1,332,430 | 960,826 | ||||||
| Other payables - related parties | 3,108,908 | 3,340,178 | ||||||
| Customer deposits | 3,019,264 | 2,338,336 | ||||||
| Lease liabilities - current | 98,582 | - | ||||||
| Taxes payable | 326,687 | 43,215 | ||||||
| Total current liabilities | 10,174,066 | 7,309,887 | ||||||
| OTHER LIABILITIES | ||||||||
| Third party loan - noncurrent | 143,345 | 145,381 | ||||||
| Lease liabilities - noncurrent | 95,752 | - | ||||||
| Total other liabilities | 239,097 | 7,455,268 | ||||||
| Total liabilities | 10,413,163 | 13,489,174 | ||||||
| Net Assets | (5,444,967 | ) | 2,068,461 | |||||
F-31
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| December 31, | December 31, | |||||||
| Results of Operations | 2019 | 2018 | ||||||
| REVENUES | ||||||||
| Equipment and systems | $ | 3,621,835 | $ | 15,298,353 | ||||
| Coating and fuel materials | 6,424,564 | 4,962,046 | ||||||
| Trading and others | - | 1,824,032 | ||||||
| TOTAL REVENUES | 10,046,399 | 22,084,431 | ||||||
| COST OF REVENUES | ||||||||
| Equipment and systems | 1,365,340 | 12,748,378 | ||||||
| Coating and fuel materials | 5,576,828 | 3,528,785 | ||||||
| Trading and others | - | 1,275,397 | ||||||
| TOTAL COST OF REVENUES | 6,942,168 | 17,552,560 | ||||||
| GROSS PROFIT | 3,104,231 | 4,531,871 | ||||||
| OPERATING EXPENSES (INCOME) | ||||||||
| Selling, general and administrative | 1,377,008 | 3,199,574 | ||||||
| Provision for (recovery of) doubtful accounts | 85,446 | (610,464 | ) | |||||
| TOTAL OPERATING EXPENSES | 1,462,454 | 2,589,110 | ||||||
| INCOME FROM OPERATIONS | 1,641,777 | 1,942,761 | ||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Loss on write off of operating and capital assets, and impairment of goodwill | (18,059,823 | ) | (4,898 | ) | ||||
| (LOSS) INCOME BEFORE INCOME TAXES | (16,418,045 | ) | 1,937,863 | |||||
| PROVISION FOR INCOME TAXES | (5,985 | ) | 82,747 | |||||
| NET (LOSS) INCOME | $ | (16,412,060 | ) | $ | 1,855,116 | |||
Note 18 – Subsequent events
On January 3, 2020, the Company entered into a Share Purchase Agreement with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) and all the shareholders of Wuge (“Wuge Shareholders”). Wuge Shareholders are Wei Xu, Bibo Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network Technology Co., Ltd., which is controlled by Wei Xu. Pursuant to the SPA, TMSR shall issue an aggregate of 4,000,000 shares of TMSR’s common stock (“TMSR Shares”) to the Wuge Shareholders, in exchange for Wuge Shareholders’ agreement to enter into, and their agreement to cause Wuge to enter into, certain VIE agreements (“VIE Agreements”) with Tongrong Technology (Jiangsu) Co., Ltd. (“WFOE”), the Company’s indirectly owned subsidiary, through which WFOE shall have the right to control, manage and operate Wuge in return for a service fee equal to 100% of Wuge’s net income (“Acquisition”). On January 24, 2020, the Company completed the Acquisition and issued the Shares to the Wuge Shareholders.
On January 3, 2020, the Company’s board of directors (the “Board”) of the Company appointed Mr. Wei Xu as a director of the Board, effective upon the closing of the Acquisition.
On January 10, 2020, TMSR Holding Company Limited (the “Company”) issued a press release announcing that on January 9, 2020 the Company received a letter from Nasdaq Listing Qualifications Staff of The NASDAQ Stock Market LLC (“Nasdaq”) stating that because the Company’s common stock had a closing bid price at or above $1.00 per share for 10 consecutive business days, the Company had regained compliance with the minimum bid price requirement of $1.00 per share for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2), and that the matter is now closed.
On February 25, 2020, Mr. Yuguo Zhang tendered his resignation as a director and the Co-Chair of the Board of Directors of TMSR Holding Company Limited (the “Company”), effective February 25, 2020. The resignation of Mr. Zhang has been approved by the Nominating and Corporate Governance Committee, the Compensation Committee and the Board of Directors of the Company. Mr. Zhang remained as the President of the Company.
On the same day, Mr. Xueyuan Han tendered his registration as a director, chairman of the Audit Committee, and member of the Compensation Committee and Nominating and Corporate Governance Committee of the Company, effective February 25, 2020. The resignation of Mr. Han has been approved by the Nominating and Corporate Governance Committee, the Compensation Committee and the Board of Directors of the Company. Mr. Han’s resignation was not the result of any disagreement with the Company’s operations, policies or procedures.
On February 25, 2020, approved by the Board of Directors, the Nominating and Corporate Governance Committee, and the Compensation Committee of the Company, Mr. Wei Xu, a director of the Company, was appointed as the Co-Chair of the Board of Directors; Mr. Mingze Yin, a director of the Company, was appointed as the chairman of the Audit Committee; Mingyue Cai was appointed as a director, the chairman of the Compensation Committee, and a member of the Audit Committee and the Nominating and Corporate Governance Committee; and Bibo Lin was appointed as the Vice President of the Company, all effective February 25, 2020.
F-32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| April 17, 2020 | TMSR Holding Company Limited | |
| By: | /s/ Yimin Jin | |
Name: Yimin Jin Title:
Chief Executive Officer | ||
| By: | /s/ Yi Li | |
Name: Yi Li Title:
Chief Financial Officer and Secretary |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Position | Date | ||
| /s/ Yimin Jin | Chief Executive Officer and | April 17, 2020 | ||
| Yimin Jin | Co-Chairman of the Board of Directors | |||
| /s/ Wei Xu | Co-Chairman of the Board of Directors | April 17, 2020 | ||
| Wei Xu | ||||
| /s/ Qihai Wang | Director | April 17, 2020 | ||
| Qihai Wang | ||||
| /s/ Yi Li | Chief Financial Officer and Secretary | April 17, 2020 | ||
| Yi Li | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Manli Long | Director | April 17, 2020 | ||
| Manli Long | ||||
| /s/ Mingyue Cai | Director | April 17, 2020 | ||
| Mingyue Cai | ||||
| /s/ Min Zhu | Director | April 17, 2020 | ||
| Min Zhu | ||||
| /s/ Mingze Yin | Director | April 17, 2020 | ||
| Mingze Yin |
70