| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis
of Presentation and Principles of Consolidation The
accompanying audited financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”). This
basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company, which
are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited
liabilities established in the PRC (“PRC GAAP”), the accounting standards used in the places of their domicile. The accompanying
consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company to present them in
conformity with U.S. GAAP. The
consolidated financial statements include the accounts of the Company, its wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated upon consolidation. The results of subsidiaries acquired or disposed
of during the respective periods are included in the consolidated statements of operations and comprehensive loss from the effective
date of acquisition or up to the effective date of disposal, as appropriate. The portion of the income or loss applicable to noncontrolling
interest in subsidiaries is reflected in the consolidated statements of operations and comprehensive loss. Going
Concern Our
consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization
of assets and liquidation of liabilities in the normal course of business. However, for the year ended December 31, 2020, the Company
has incurred a net loss of approximately $0.9 million and working capital deficit of approximately $8.6 million and its cash balance
and revenues generated are not currently sufficient and cannot be projected to cover operating expenses and meet the Company’s
obligations as they become due for the next twelve months from the date that our financial statements are issued. These factors raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s
plan to alleviate the substantial doubt about the Company’s ability to continue as a going concern include attempting to improve
its business profitability, its ability to generate sufficient cash flow from its operations to meet its operating needs on a timely
basis, obtain additional working capital funds through debt and equity financings to eliminate inefficiencies in order to meet its anticipated
cash requirements. However, there can be no assurance that these plans and arrangements will be sufficient to fund the Company’s
ongoing capital expenditures, working capital, and other requirements. The
accompanying consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying
amount or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. Foreign
Currency Translation The
accompanying consolidated financial statements are presented in United States dollar (“$”), which is the reporting currency
of the Company. The functional currency of TDH Holdings, TDH HK, TDH Petfood LLC and TDH Foods Limited is United States dollar. The functional
currency of Tiandihui, Tiandihui Pet Foodstuffs, Tiandihui Foodstuffs Sales and Chongai Jiujiu is Renminbi (“RMB”). The functional
currency of TDH Group BVBA is Euro (“€”). The functional currency of TDH JAPAN is Yen (“¥”). For the
subsidiaries whose functional currencies are RMB, Euro and Yen, results of operations and cash flows are translated at average exchange
rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated
at historical exchange rates. The resulting translation adjustments are included in determining other comprehensive income or loss. Transaction
gains and losses are reflected in the consolidated statements of operations. The
exchange rates used to translate amounts in RMB into U.S. Dollars for the purpose of preparing the consolidated financial statements
were as follows (USD$1=RMB):
Period Covered Balance Average
Year ended December 31, 2020 6.5277 6.9001
Year ended December 31, 2019 6.9680 6.9088 The
exchange rates used to translate amounts in Euro into U.S. Dollars for the purpose of preparing the consolidated financial statements
were as follows (USD$1=€):
Period Covered Balance Average
Year ended December 31, 2020 0.8153 0.8772
Year ended December 31, 2019 0.8916 0.8934 The
exchange rates used to translate amounts in Yen into U.S. Dollars for the purpose of preparing the consolidated financial statements
were as follows (USD$1=¥):
Period Covered Balance Average
Year ended December 31, 2020 103.1589 106.7408
Year ended December 31, 2019 108.6384 109.0086 Use
of Estimates The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on historical
experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and
assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new
events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Significant
estimates and assumptions by management include, among others, useful lives and impairment of long-lived assets, allowance for credit
losses, write-down in value of inventories and income taxes including the valuation allowance for deferred tax assets. Estimates and assumptions
are periodically reviewed and the effects of revisions are reflected in the financial statements in the period they are determined to
be necessary. COVID-19
Pandemic The
COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may
negatively affect our business operations. As a result, as the pandemic persists and/or if it worsens, our accounting estimates and assumptions
could be impacted in subsequent periods, and it is reasonably possible such changes could be significant (although the potential effects
cannot be estimated at this time). Cash
and Cash Equivalents Cash
and cash equivalents include cash on hand, cash in time deposits and highly liquid investments purchased with original maturities of
three months or less. Restricted
Cash Restricted
cash mainly represents bank deposits used to pledge the bank acceptance notes, bank deposits judicially frozen by the court and cash
deposit in an escrow account. Short-term
Investments Starting March 2020 and throughout the year ended
December 31, 2020, TDH Holdings invested in equity securities of certain publicly listed companies through various open market transactions.
The investments in marketable securities are managed and operated by an asset management company. Pursuant to the asset management agreement,
for the period from March 1, 2020 to December 31, 2020, the asset management company is entitled to 25% of total realized gain if certain
condition is met. In addition, if the total accumulated realized gain as of December 31, 2020 is in excess of 20% (“exceeding portion”),
the asset management company is entitled to additional monetary reward in the amount of 70% of the exceeding portion of the total realized
gain. TDH Holdings’ investments in marketable
securities are accounted for pursuant to ASC 321 and reported at their readily determinable fair value as quoted by market exchanges in
the consolidated balance sheets with change in fair value recognized in earnings. For the year ended December 31, 2020, change in fair
value, including unrealized gain of approximately $0.2 million and net realized gain of approximately $1.9 million, which consists of
gross realized gain of approximately $6.3 million net with investment management fee of approximately $4.4 million, was presented as
“investment income, net” in the accompanying consolidated statement of operations and comprehensive loss. Also see Note 9. Current Expected Credit Losses On January 1, 2020, the Company adopted FASB Accounting
Standards Update (ASU) 2016-13 “ Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments Our expected loss allowance methodology is
developed using an aging method and analyses of historical credit losses experience, current economic conditions, future market
forecasts and any recoveries in assessing the lifetime expected credit losses. Additionally, external data and macroeconomic factors
are also considered. Inventories Inventories,
consisting of raw materials, work in progress, and finished goods, are stated at the lower of cost or net realizable value, with cost
computed on a weighted-average basis. The valuation of inventory requires us to estimate excess and slow-moving inventory. We evaluate
the recoverability of our inventory based on assumption about expected demand, market conditions, forecasts prepared by its customers,
sales contracts and orders in hand. Property,
Plant and Equipment Property,
plant and equipment, are stated at cost less depreciation. Cost represents the purchase price of the asset and other costs incurred to
bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense;
major additions to physical properties are capitalized. Depreciation
of property, plant and equipment is calculated based on cost, less their estimated residual value, if any, using the straight-line method
over their estimated useful lives. Estimated useful lives are as follows:
Machinery equipment 5 - 20 years
Computer software 10 years
Electronic equipment 5 - 10 years
Office equipment 5 - 10 years
Motor vehicles 5 - 10 years
Leasehold improvement Shorter of the lease term
or estimated useful life
Buildings 20 - 50 years Land
Use Rights According
to the law of PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only
through land use rights granted by the Chinese government for a specified period of time. Land use rights are being amortized using the
straight-line method over the periods the rights are granted. Impairment
of Long-Lived Assets and Goodwill The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted
future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. The Company recorded impairment loss on long-lived assets other than goodwill of $0, $813,344
and $0 for the years ended December 31, 2020, 2019 and 2018, respectively. The
Company’s goodwill is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. In testing for goodwill impairment, the Company compares the fair value of its
reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting
unit’s fair value, the Company will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting
unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. The Company
recorded impairment of goodwill of $0, $0 and $1,599,591 for the years ended December 31, 2020, 2019 and 2018, respectively. Long-term
Investments The
Company’s long-term investments consist of equity investments without readily determinable fair value and equity method investment. In
accordance with ASC 323, Investments-Equity Method and Joint Ventures The
Company continually reviews its investment under equity method to determine whether a decline in fair value to below the carrying value
is other-than-temporary. The primary factors in its determination are the duration and severity of the decline in fair value, the financial
condition, operating performance and the prospects of the equity investee, and other company specific information such as recent financing
rounds. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the equity investee is written down
to fair value. For
equity securities without readily determinable fair value and do not qualify for the existing practical expedient in ASC 820, Fair Value
Measurements and Disclosures to estimate fair value using the net asset value per share (or its equivalent) of the investment, the Company
elected to use the measurement alternative to measure those investments at cost, less any impairment, plus or minus changes resulting
from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes
assessment of whether an investment is impaired at each reporting date and recognizes an impairment loss equal to the difference between
the carrying value and fair value in the consolidated statements of operations and comprehensive loss if there is any. The Company makes
a qualitative assessment of whether the investments are impaired at each reporting date. Fair
Value of Financial Instruments Accounting
guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurement for assets and liabilities required
or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact
and it considers assumptions that market participants would use when pricing the asset or liability. The
Company measures certain financial assets, including the investment under the measurement alternative method and equity method on other-than-temporary
basis, intangible assets and fixed assets at fair value when an impairment charge is recognized. Accounting
guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs
that may be used to measure fair value: Level
1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level
2 — Include other inputs that are directly or indirectly observable in the marketplace. Level
3 — Unobservable inputs which are supported by little or no market activity. Accounting
guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income
approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving
identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present
value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach
is based on the amount that would currently be required to replace an asset. For certain of the Company’s financial instruments, including
cash and cash equivalents, restricted cash, accounts receivable, advances to suppliers, inventories, prepayments and other current assets,
accounts payable, advances from customers, taxes payable, bank overdrafts, short-term loans and other current liabilities,
the carrying amounts approximate their fair values due to the short maturities. The fair value of the Company’s investments in the
equity securities of publicly listed companies are measured using quoted market prices. The
following table presents information about the Company’s assets that are measured at fair value on a recurring basis as of December
31, 2020 and 2019 and indicates the fair value hierarchy of the valuation.
Quoted
Prices in Active Markets for Identical Assets (Level
1) Significant
Other Observation Inputs (Level
2) Significant
Unobservable Inputs (Level
3) Total
Publicly listed equity securities
As of December 31, 2020 $ 3,138,578 - - 3,138,578
As of December 31, 2019 $ - - - - Lease
Commitments On January 1, 2019, the Company adopted ASU 2016-02,
Leases The
initial lease liability is equal to the future fixed minimum lease payments discounted using the Company’s incremental borrowing
rate, on a secured basis. The lease term includes option renewal periods and early termination payments when it is reasonably certain
that the Company will exercise those rights. The initial measurement of the right-of-use asset is equal to the initial lease liability
plus any initial direct costs and prepayments, less any lease incentives. The
primary impact of applying ASC Topic 842 is the initial recognition of approximately $0.4 million of operating lease liabilities, and
approximately $0.4 million of corresponding right-of-use assets, on the Company’s consolidated balance sheet as of January 1, 2019,
for leases classified as operating leases under ASC Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements.
There is no cumulative effect to retained earnings or other components of equity recognized as of January 1, 2019. Payments
made under operating leases are charged to the consolidated statements of operations and comprehensive loss on a straight-line basis
over the lease period. The Company does not have finance lease arrangements as of December 31, 2020 and 2019. See Note 15 for further
discussion. Loss
per Share Basic
loss per common share is computed by dividing net loss attributable to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted loss per share is computed by dividing net loss attributable to common shareholders by the sum
of the weighted average number of common shares outstanding and dilutive potential common shares during the period. Potentially dilutive
common shares consist of common shares warrants using the treasury stock method. Common equivalent shares are not included in the denominator
of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive. Revenue
Recognition Revenue
is measured according to ASC Topic 606, Revenue from Contracts with Customers Revenue
is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities, including value-added
tax (“VAT”), business tax, applicable local government levies. At the time revenue is recognized, allowances are recorded,
with the related reduction to revenue, for estimated sales returns based upon historical experience and related terms of customer arrangements. The
allowance for sales returns recorded by the Company was $0, $0.06 million and $0.89 million for the years ended December 31, 2020, 2019
and 2018, respectively. The Company does not provide rebate, pricing protection or any other concessions to its customers. The
Company elected to account for shipping and handling fees that occur after the customer has obtained control of goods, for instance,
free onboard shipping point arrangements, as a fulfillment cost and accrues for such costs. Management
has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Revenue under
the segment reporting standard is measured on the same basis as under the revenue standard. See Note 14 for information regarding revenue
disaggregation by product lines, marketing channels and countries. Contract
liabilities are recorded when consideration is received from a customer prior to transferring the control of goods to the customer or
other conditions under the terms of a sales contract. As of December 31, 2020 and 2019, the Company recorded contract liabilities of
$90,834 and $116,155, respectively, which were presented as advances from customers on the accompanying consolidated balance sheets. During
the years ended December 31, 2020 and 2019, the Company recognized $56,983 and $158,274 of contract liabilities as revenue, respectively. Government
Grants Government
grants include cash subsidies as well as other subsidies received from the PRC government by the subsidiaries of the Company. Such subsidies
are generally provided as incentives from the local government to encourage the expansion of local business. The government grant is
recognized in the consolidated statements of operations and comprehensive loss when cash is received and the relevant performance criteria
specified in the grant are met. Research
and Development Research
and development costs are expensed as incurred. The costs primarily consist of raw materials used and salaries paid for the development
and improvement of the Company’s products. Selling
Expenses Selling
expenses consist primarily of advertising, salaries and shipping and handling costs incurred during the selling activities. Advertising
and transportation expenses are charged to expense as incurred. Shipping
and handling expenses amounted to $620, $287,385 and $741,816 for the years ended December 31, 2020, 2019 and 2018, respectively. Advertising
costs amounted to $144, $22,221 and $150,154 for the years ended December 31, 2020, 2019 and 2018, respectively. Income
Taxes The
Company accounts for income taxes under the provision of FASB ASC 740-10, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. Comprehensive
Income/Loss ASC
220 “ Comprehensive Income Loss
Contingencies The
Company records accruals for certain of its outstanding legal proceedings or claims when it is probable that a liability will be incurred
and the amount of loss can be reasonably estimated. When a loss contingency is not both probable and estimable, the Company does not
record an accrued liability but discloses the nature and the amount of possible loss, if material, in the notes to the consolidated financial
statements. The
Company reviews the developments in contingencies that could affect the amount of the provisions that has been previously recorded, and
the matters and related possible losses disclosed. The Company makes adjustments to provisions and changes to its disclosures accordingly
to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. The assessment of whether
a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involves complex judgments about
future events. Management is often unable to estimate the loss or a range of loss, particularly where (i) the damages sought are indeterminate,
(ii) the proceedings are in the early stages, or (iii) there is a lack of clear or consistent interpretation of laws specific to the
industry-specific complaints among different jurisdictions. In such cases, there is considerable uncertainty regarding the timing or
ultimate resolution of such matters, including eventual loss, fine, penalty or business impact, if any. Concentration
of Credit Risk Financial
instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents, restricted cash,
and accounts receivable arising from its normal business activities. The Company places its cash and cash equivalents in financial
institutions in the U.S., the PRC, Hong Kong and New Zealand, which the management believes to be credit-worthy. The Company establishes an allowance for credit losses primarily based upon the age of receivables and factors
surrounding the credit risk of specific customers. Related
Parties Transactions A
related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families,
(ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control
with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction
is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related
parties may be individuals or corporate entities. Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive,
free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related
party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations
can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related
party nature. Segment
Reporting The
Company uses the “management approach” in determining reportable operating segments. The management approach considers the
internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing
performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker
has been identified as the chief executive officer of the Company who reviews financial information based on U.S. GAAP. The chief operating
decision maker now reviews results analyzed by marketing channel. This analysis is only presented at the revenue level with no allocation
of direct or indirect costs. Consequently, the Company has determined that it has only one operating segment. Recently
Issued Accounting Pronouncements not yet adopted In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) |
