GD Culture Group Ltd. (filing registrant: Code Chain New Continent Limited) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited interim financial statements. The filing was signed June 26, 2020. The registrant subsequently changed its name from TMSR Holding Company Limited to Code Chain New Continent Limited and trades under ticker CCNC. The provided filing does not identify GD Culture Group Ltd. as the registrant.
Business context
The company’s continuing operations were primarily coal, coke, steel, construction-material and related fuel trading through Jiangsu Rong Hai Electric Power Fuel Co., Ltd. It also consolidated Wuge, a development-stage Chinese mobile-game, Internet-of-Things and electronic-token business acquired through contractual arrangements in January 2020. Wuhan HOST and Shengrong WFOE were classified as discontinued operations.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $5.165 million | $5.033 million |
| Gross profit | $182,428 | $83,805 |
| Gross margin | 3.5% | 1.7% |
| Loss from operations | $(274,204) | $(388,312) |
| Operating margin | (5.3%) | (7.7%) |
| Loss from continuing operations | $(313,778) | $(420,514) |
| Income from discontinued operations | $500,179 | $(310,932) |
| Net income (loss) | $186,401 | $(731,446) |
| Basic and diluted EPS | $0.01 | $(0.04) |
| Operating cash flow | $846,513 | $831,736 |
| Investing cash flow | $(1.778) million | $(16,876) |
| Financing cash flow | $444,190 | $(989,187) |
Fuel-material revenue increased 6.1% to $5.165 million and represented all reported revenue. The company reported sales of 91,138 tons of coal at an average selling price of approximately $56.68 per ton. Other revenue fell to zero from $165,829.
At March 31, 2020, total assets were $30.834 million, total liabilities were $14.118 million and shareholders’ equity was $16.716 million. Balance-sheet cash and cash equivalents were $1.699 million, while the cash-flow statement reported $3.711 million of consolidated ending cash, reflecting cash classified within discontinued operations. Current assets were $11.791 million against current liabilities of $13.822 million. The filing’s MD&A separately reports approximately $5.9 million of net working capital, so the presentation and reconciliation of liquidity should be verified.
Debt included $437,538 of bank short-term loans bearing weighted-average rates of 4.5% and 5.22%, with maturities in January and March 2021 and personal-property guarantees. Related-party payables totaled $1.341 million, were interest-free, unsecured and due on demand. Lease liabilities totaled approximately $121,733.
Material changes versus the prior comparable period
- Revenue increased 2.6%, while gross profit more than doubled because coal prices declined and gross margin improved.
- Operating loss narrowed by $114,108, or 29.4%, primarily from higher gross profit and recoveries of doubtful accounts.
- Net income improved by $917,847, mainly because discontinued operations contributed $500,179 versus a $310,932 loss in Q1 2019.
- Operating cash flow remained positive and increased modestly, but investing outflows rose sharply due to approximately $1.147 million of intangible-asset purchases and $573,148 invested in financial products.
- The company issued 4,000,000 shares for the Wuge acquisition and ended the quarter with 28,514,520 shares outstanding, compared with 20,821,661 at December 31, 2019. Goodwill increased substantially, including approximately $7.14 million recorded for Wuge.
- Cash decreased by $545,180 during the quarter after investing and foreign-exchange effects, despite operating and financing inflows.
Outlook, commentary, risks and unusual items
- Management stated that COVID-19 temporarily closed offices and production facilities beginning in February 2020. Reopening was gradual, and management could not reasonably estimate the continuing disruption or financial impact.
- Management expected existing cash and operating cash flow to meet anticipated needs for at least the next twelve months, but noted that additional debt or equity financing may be required for changed conditions, investments or acquisitions.
- Customer concentration was significant: two customers generated 53.4% and 39.7% of Q1 revenue and represented 79.8% and 19.6% of accounts receivable at March 31, 2020. Two suppliers accounted for 52.6% and 32.9% of purchases.
- Wuge was a development-stage business, and the $7.2 million acquisition consideration was primarily allocated to goodwill. Goodwill and other acquisition-related asset values remain subject to impairment risk.
- The company operates primarily in China and faces PRC regulatory, currency-conversion, economic, customer-credit and transfer-of-funds risks. Cash held in PRC financial institutions is not described as government-insured.
- The company consolidated Rong Hai and Wuge through variable-interest-entity contractual arrangements rather than direct equity ownership. The enforceability and regulatory treatment of these arrangements are material risks.
- The company disclosed that its disclosure controls and procedures were not effective as of the evaluation date stated in the filing. No material changes to internal control over financial reporting were reported during the quarter.
- A potential $431,129 unpaid balance remains on land-use rights acquired by Wuhan HOST. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
- Subsequent events included a May 2020 offering of 5,695,073 shares at $1.50 per share for gross proceeds of approximately $8.54 million and the May 2020 corporate name and ticker change.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied metadata names GD Culture Group Ltd., but the filing identifies Code Chain New Continent Limited and discusses prior TMSR names.
- Reconcile the $1.699 million balance-sheet cash figure with the $3.711 million cash-flow ending balance, including discontinued-operation cash.
- Assess whether the reported $500,179 discontinued-operations gain is recurring; it largely reflects a $500,179 recovery of doubtful accounts.
- Evaluate the sustainability and collectability of fuel-trading revenue given the high customer and supplier concentrations.
- Review the Wuge acquisition, VIE structure, $7.14 million goodwill addition and potential impairment exposure.
- Review the effectiveness deficiency in disclosure controls and the company’s ability to transfer cash from PRC subsidiaries to the parent.
- Verify the impact of the May 2020 equity offering on dilution, liquidity and capital resources.