TDH Holdings, Inc. — FY2020 Form 20-F
Reporting period: Year ended December 31, 2020; filed April 26, 2021. This is an annual report, not a standalone fourth-quarter filing. TDH develops, manufactures and sells pet food and related products, primarily through operations in China. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $815,225 | $12,648,255 |
| Gross profit (loss) / margin | $(41,835) / (5.13%) | $(1,522,880) / (12.04%) |
| Operating expenses | $1,884,102 | $5,435,616 |
| Operating loss | $(1,925,937) | $(6,958,496) |
| Net loss | $(874,668) | $(8,625,427) |
| Basic and diluted loss per share | $(0.02) | $(0.41) |
| Cash used in operating activities | $(2,628,255) | $(5,626,618) |
- Revenue fell 93.6% year over year. Overseas sales declined to $226,385 from $9,995,136; domestic sales to $574,921 from $2,711,445; and e-commerce sales to $16,708 from $83,779.
- The gross margin improved, but remained negative. Operating expenses decreased 65.3%, while operating loss remained substantial relative to the sharply reduced revenue.
- Net loss narrowed substantially, but included $2,120,241 of investment income from marketable securities. The filing attributes this to approximately $6.3 million gross realized gains and approximately $4.4 million investment-management fees, plus approximately $0.2 million unrealized gains.
- Year-end assets were $18.45 million, liabilities $19.35 million, and stockholders’ equity was a deficit of $892,780. Current assets were $10.52 million against current liabilities of $19.07 million; the reported working-capital deficit was approximately $8.55 million.
- Year-end cash and cash equivalents were $6.57 million, restricted cash $182,515, and short-term investments $3.14 million. Cash used in operations was partly offset by $3.36 million of investing cash inflow, principally net proceeds from buying and selling short-term investments. Financing activities used $589,358.
- Short-term loans were $8.39 million, with another $985,883 of related-party short-term loans. Total liabilities were $19.35 million. The filing reports approximately $12.78 million of indebtedness in default at December 31, 2020; substantially all outstanding loans were delinquent or subject to lender proceedings.
Material changes and business developments
- Production and normal operations were suspended beginning in late 2019 amid raw-material cost increases, operational inefficiency, loan defaults and vendor disputes. Operations resumed in May 2020, but pandemic disruptions, reduced orders and supply-chain and logistics problems constrained the recovery.
- Management reported daily production capacity of 5.4 tons, down from 8.0 tons in 2019. One company facility was court-frozen, although it remained usable for production when orders were received. Headcount was 54 at year-end, compared with 50 in 2019 and 204 in 2018.
- On March 13, 2021, a court-auctioned property and land-use right generated approximately $5.10 million. Approximately $3.19 million was applied to repay China Construction Bank; management planned to use approximately $1.3 million for vendor claims and $0.56 million for labor-arbitration claims. Vendor settlements remained in progress as of filing.
- A December 2020 private placement of 9.1 million shares at $0.30 per share generated $2.73 million in April 2021, after year-end. The proceeds were intended for working capital and general purposes.
- The company’s short-term investments generated significant reported gains, while research and development expense was zero in 2020 and 2019.
Outlook, risks and contingencies
- Going concern: The auditor’s report and management state that substantial doubt exists about the company’s ability to continue as a going concern. The company reported recurring losses, a working-capital deficit, operating cash outflow and insufficient projected cash and revenue to meet obligations over the following 12 months. Management plans to improve profitability and cash generation and seek debt or equity financing, but gives no assurance these steps will succeed; it had no third-party financing commitments at filing.
- Debt, litigation and liquidity: Vendor claims across 57 lawsuits were reported at approximately RMB13.86 million ($2.12 million); labor claims totaled approximately RMB3.68 million ($0.56 million), across 98 arbitrations. Several bank and lender obligations remained unpaid after court rulings, with potential further interest, asset seizures and bankruptcy risk. The filing describes outstanding repayment and settlement timing as uncertain.
- COVID-19 and recovery: Management expected negative pandemic effects to gradually ease, but said renewed disruption could affect orders, collections and supply. It provided no quantified revenue or earnings guidance and cautioned that future results and cash flows could underperform.
- Controls and listing: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to a material weakness related to management turnover and inadequate continuity controls. Remediation was intended by year-end 2021. Nasdaq confirmed continued listing compliance in November 2020, but the company warned compliance was not assured.
- Other material risks include competition and pricing pressure, raw-material costs, customer and supplier concentration, limited production capacity, reliance on key personnel, PRC regulatory and currency controls, and possible difficulty accessing capital markets. TDH Group BVBA was in bankruptcy proceedings; TDH Japan was dissolved in February 2021.
Most important facts for investors to verify
- Whether the company has completed settlements with vendors, lenders and former employees, and whether any additional claims, interest or court actions remain.
- How auction proceeds were ultimately allocated, and the operational impact of losing the auctioned property and related production assets.
- Whether the April 2021 $2.73 million placement proceeds and any subsequent financing materially improved liquidity and debt repayment capacity.
- Whether production, sales and operating cash flow recovered after 2020, and whether gross margins turned positive without relying on investment gains.
- Whether management remediated the reported material weakness and whether Nasdaq listing requirements continued to be met.
- The composition, liquidity and performance of short-term investments, including management fees and the sustainability of investment income.