Explanation of the Significant Impact of Matters Related to the 2020 Audit Report's Qualified Opinion Being Eliminated by the Board of Directors

Explanation of the Significant Impact of Matters Related to the 2020 Audit Report's Qualified Opinion Being Eliminated

On January 30, 2021, Asia Pacific (Group) CPA Firm (Special General Partnership) issued a qualified audit report (Audit Report No. [2021] 01140001) on the 2020 financial statements of Kairde Holdings Co., Ltd. (hereinafter referred to as "Kairde" or "the Company"). The board of directors now provides the following explanation regarding the elimination of significant impacts related to the qualified opinion in the 2020 audit report:

1. Content of the Qualified Opinion in the 2020 Audit Report

(1) Basis for the Qualified Opinion

1. Credit Impairment Matters
   • Accounts Receivable Impairment
     • As stated in Note 6 of the financial statements, as of December 31, 2020, Kairde had receivables from the original shareholder Zhang Peifeng amounting to 170,938,699.00 yuan. In 2020, Kairde recognized a credit impairment of 145,987,829.10 yuan for this receivable, with a cumulative credit impairment of 170,938,699.00 yuan. Kairde did not provide sufficient and appropriate evidence for the credit impairment of the receivable from Zhang Peifeng, making it impossible to assess the reasonableness and accuracy of the impairment.
     • As noted in the financial statements, as of December 31, 2020, Kairde recognized expected credit losses for accounts receivable amounting to 41,418,724.75 yuan, with a bad debt provision of 23,033,165.03 yuan; for other receivables, the balance was 43,305,315.02 yuan, with a bad debt provision of 18,552,659.76 yuan. Kairde applied expected credit loss provisions based on credit conditions at rates of 5% (for receivables aged 3 years or less) and 60% (for receivables aged over 3 years). Kairde did not provide evidence for the expected credit loss provision rates, making it impossible to assess their reasonableness and sufficiency, nor did we obtain sufficient evidence regarding the recoverability of these receivables.
   • Other Equity Instrument Impairments
     • As stated in Note 6 of the financial statements, as of December 31, 2020, Kairde recognized a credit impairment loss of 14,000,000.00 yuan for its investment in Hangzhou Quanzhimai E-commerce Co., Ltd. We conducted necessary audit procedures, including communication with the controlling party's attorney, the investee, and the company's governance, and learned that Hangzhou Quanzhimai E-commerce Co., Ltd. did not operate normally throughout 2020 due to internal reasons, creating significant uncertainty about its future operations. Since Kairde did not provide the financial statements for Hangzhou Quanzhimai E-commerce Co., Ltd. for 2020, we lacked sufficient evidence to assess its operational status and equity value, nor could we reasonably determine whether adjustments to the credit impairment of other equity investments were necessary.