Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2020. The filing identifies the registrant as Code Chain New Continent Limited, formerly TMSR Holding Company Limited, rather than GD Culture Group Ltd. The Company operated primarily in China through two contractually controlled VIEs: Rong Hai, a coal and fuel-materials wholesaler, and Wuge, an early-stage IoT, mobile-game, e-commerce and electronic-token business.
On June 30, 2020, the Company disposed of China Sunlong and its subsidiaries, including Wuhan HOST and Shengrong WFOE. Those operations are presented as discontinued operations. Wuge was acquired in January 2020 in exchange for 4.0 million shares.
Financial Results and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $11.85 million | $19.58 million | Down 39.5% |
| Fuel-materials revenue | $11.26 million | $18.96 million | Down 40.6% |
| Trading and other revenue | $591,455 | $628,489 | Down 5.9% |
| Gross profit | $1.10 million | $562,235 | Up 96.5% |
| Gross margin | Approximately 9.3% | Approximately 2.9% | Improved |
| Loss from operations | $(953,257) | $(289,403) | Loss increased |
| Loss from continuing operations | $(4.79 million) | $(414,283) | Loss increased |
| Net income/(loss) | $2.51 million | $(16.83 million) | Improved |
| Basic and diluted EPS | $0.09 | $(0.79) | Improved |
| Cash flow from operations | $(2,101) | $759,457 | Declined |
| Cash flow from investing | $(4.53 million) | $0 | Increased use |
| Cash flow from financing | $3.06 million | $2.48 million | Increased |
| Year-end cash and equivalents | $998,717 | $4.03 million | Down $3.03 million |
Gross profit increased despite lower revenue, primarily because of the addition of Wuge and the discontinued operations presentation. Operating expenses rose to $2.06 million, including $1.73 million of SG&A and $330,045 of doubtful-account expense. The Company recorded $3.90 million of goodwill impairment related to Rong Hai.
The reported $2.51 million net income was driven largely by discontinued operations income of $505,061 and a $6.79 million gain on disposal. Continuing operations remained loss-making, with an approximate continuing-operations margin of negative 40.4% and an overall reported net margin of approximately 21.2%.
At December 31, 2020, current assets were $11.98 million and current liabilities were $3.19 million according to the consolidated balance sheet. Cash was $998,717, short-term investments were $3.30 million, accounts receivable net was $1.07 million, inventories were $1.05 million, and prepayments were $4.78 million. Net working capital was described by management as a deficit of approximately $8.8 million, although management stated that excluding related-party liabilities the Company had approximately $9.3 million of net working capital.
Debt included $475,103 of short-term bank loans, with stated interest rates of 4.5% and 5.22%, plus current lease liabilities of $101,292. Related-party payables were $491,136 and were described as unsecured, interest-free and due on demand. The filing states that existing cash and operating cash flows should meet anticipated needs for at least twelve months, but additional debt or equity financing may be required.
Material Changes Versus the Prior Comparable Period
- Revenue declined 39.5%, primarily because COVID-19 reduced Rong Hai fuel-material sales.
- Gross profit nearly doubled, but the Company remained loss-making from operations and continuing operations.
- Net results improved from a $16.83 million loss to $2.51 million of income, primarily because of the $6.79 million gain on disposal and the absence of the prior-year discontinued-operations losses.
- Cash fell materially as the Company used $4.53 million in investing activities, including approximately $1.16 million for intangible assets and $3.12 million for financial products.
- Wuge contributed approximately $591,455 of 2020 revenue and remained in an early development stage. Its acquisition generated approximately $7.34 million of goodwill.
- Rong Hai’s goodwill was impaired by approximately $3.90 million. Goodwill totaled $11.65 million at year-end, representing a substantial portion of total assets.
- Customer concentration increased materially. The filing states that one customer accounted for 74.8% of consolidated revenue, while other business disclosures state Nantong Linan accounted for 99.1% of Rong Hai sales and three customers accounted for 99.1% of total revenue.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified revenue, earnings or margin guidance. Management expects Rong Hai and Wuge to remain dependent on Chinese market conditions and stated that additional financing may be needed for growth, acquisitions or changed business conditions.
- COVID-19: Temporary closures and reduced customer demand adversely affected 2020 operations. The duration and financial effect of future disruptions were stated to be uncertain.
- Customer and supplier concentration: Loss of a major customer or supplier, pricing pressure, or collection problems could materially affect revenue and liquidity.
- VIE structure: Rong Hai and Wuge are controlled through contractual arrangements rather than direct equity ownership. PRC regulators could challenge the structure, restrict operations, impose penalties or prevent the Company from receiving economic benefits.
- China regulatory and currency exposure: The Company depends on PRC licenses, foreign-exchange controls, tax rules, dividend restrictions and evolving foreign-investment regulations. Substantially all operations and assets are in China.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were not effective at year-end. Material weaknesses included inadequate U.S. GAAP expertise and the absence of a formal training plan. Management planned to use outside consultants and provide training.
- Liquidity: Operating cash flow was approximately breakeven, cash declined substantially, and the Company relied on equity issuance, bank loans and related-party funding.
- Subsequent financing: In February 2021, the Company raised gross proceeds of approximately $25.0 million through common stock and warrants, before fees and expenses. The financing included 4.17 million shares and warrants to purchase up to approximately 4.17 million additional shares, subject to stated adjustments and stockholder approval requirements.
- Proposed conversion: The filing describes a proposed conversion from Nevada to a Cayman Islands exempted company, which was not effective as of the filing date. If completed, the Company expected foreign-private-issuer exemptions that could reduce reporting and shareholder-protection requirements.
- Legal matters: Management reported no pending litigation expected to have a material adverse effect and no material environmental enforcement actions as of December 31, 2020.
Most Important Facts to Verify
- Confirm the issuer identity and ticker because the supplied request names GD Culture Group Ltd., while the filing identifies Code Chain New Continent Limited and ticker CCNC.
- Reconcile customer concentration disclosures: the filing separately reports 74.8% of consolidated revenue for one customer, 99.1% of Rong Hai sales for Nantong Linan, and 99.1% of total revenue for three customers.
- Review the audited balance sheet because the extracted text reports total assets of $25.14 million but also displays total liabilities and shareholders’ equity of $32.85 million for 2019, which does not reconcile with the reported 2019 total assets of $22.45 million.
- Assess the sustainability of reported net income after removing the $6.79 million disposal gain and discontinued-operations results; continuing operations generated a $4.79 million loss.
- Evaluate the recoverability of $11.65 million of goodwill and the Company’s significant concentration in prepayments, receivables and PRC-based assets.
- Confirm the status and terms of the February 2021 financing, including dilution, warrant price-protection provisions and required stockholder approval.
- Review remediation of the material weaknesses in U.S. GAAP reporting and internal controls.
- Assess the enforceability and regulatory status of the Rong Hai and Wuge VIE arrangements, including applicable PRC licenses and foreign-exchange registrations.