Business Context and Reporting Period
This unaudited Form 10-Q covers the three months ended March 31, 2021. The filing identifies the registrant as Code Chain New Continent Limited, formerly TMSR Holding Company Limited, rather than GD Culture Group Ltd. The company trades on Nasdaq under CCNC and conducts substantially all primary operations in China.
Following the March 31, 2021 disposition of Tongrong Technology (Jiangsu) Co., Ltd. and its contractually controlled Rong Hai business, continuing operations primarily consist of Wuge, a technology and IoT-related business producing digital door signs and developing related applications.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $3.38 million | $0 |
| Gross profit | $3.38 million | $0 |
| Gross margin | Approximately 99.9% | Not meaningful |
| Operating expenses | $17.76 million | $0.22 million |
| Loss from operations | $(14.39) million | $(0.22) million |
| Loss from continuing operations | $(15.11) million | $(0.22) million |
| Net loss | $(26.34) million | Net income of $0.19 million |
| Basic and diluted loss per share | $(0.80) | $0.01 |
| Cash flow from operating activities | $0.39 million provided | $0.85 million provided |
| Cash flow from investing activities | $(1.19) million | $(1.78) million |
| Cash flow from financing activities | $22.79 million provided | $0.44 million provided |
- Revenue was entirely from Wuge digital door signs. The filing does not provide a clear customer or product concentration breakdown for this revenue.
- Gross profit was $3.38 million because cost of revenue was only $4,793. Operating expenses substantially exceeded gross profit, producing an operating margin of approximately negative 425%.
- SG&A increased to $17.76 million from $0.22 million, primarily because of $16.92 million of employee compensation settled through stock issuance.
- The net loss included an $11.26 million after-tax loss on disposal of discontinued operations and $23,571 of income from discontinued operations.
- Cash and cash equivalents increased to $22.92 million from $1.00 million at December 31, 2020. Approximately $17.33 million was held at one U.S. financial institution and $5.59 million at financial institutions in China.
- Total assets were $37.65 million and total liabilities were $5.00 million at March 31, 2021. Shareholders’ equity was $32.65 million.
- Short-term bank loans and lease liabilities were reported at zero at March 31, 2021. Related-party payables were $466,407 and were unsecured, interest-free and due on demand.
- Net working capital was approximately $23.5 million, according to management.
Material Changes Versus the Prior Comparable Period
- Wuge generated $3.38 million of revenue in Q1 2021 versus no continuing-operations revenue in Q1 2020.
- Operating expenses increased by $17.54 million, or approximately 8,053%, driven principally by employee compensation.
- The company changed from a $186,401 net income to a $26.34 million net loss, primarily because of the large disposal loss and increased compensation expense.
- Operating cash flow declined to $394,702 from $846,513 despite the reported net loss, reflecting noncash stock compensation and disposal-related adjustments, along with changes in prepayments, customer deposits and taxes payable.
- The company received $22.54 million from issuing 4,166,666 common shares in a February 2021 registered direct offering and related warrant transactions. Shares outstanding increased to 35,916,323 at March 31, 2021 from 29,176,026 at December 31, 2020.
- Rong Hai and Tongrong WFOE were classified as discontinued operations following the March 31, 2021 disposition. Their Q1 2021 revenue of $4.89 million was excluded from continuing-operations revenue.
- Goodwill declined from $11.65 million to $7.75 million, principally due to the disposal of Rong Hai and Tongrong WFOE.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal revenue, earnings or cash-flow guidance. Management states that existing cash and operating cash flows are expected to fund anticipated needs for at least the next twelve months, but indicates that additional debt or equity financing may be required for changed conditions, investments, acquisitions or strategic initiatives.
- On April 16, 2021, the company agreed to purchase 10,000 Bitcoin mining machines for RMB40.0 million, or approximately $6.16 million, payable in cash. The agreement contemplates cryptocurrency-based operating receipts and potential stock-based bonus and additional consideration, capped at 19.99% of outstanding shares as of the agreement date.
- The Bitcoin-mining transaction is a subsequent event and is not reflected in the March 31, 2021 financial statements. Its profitability, funding, cryptocurrency exposure and regulatory implications remain uncertain.
- Management cites risks related to the limited operating history and market acceptance of Wuge’s products, dependence on development and marketing partners, cybersecurity, intellectual-property claims, COVID-19 disruption, foreign exchange restrictions, credit concentration and liquidity.
- Substantially all operations are in China. Cash held in Chinese financial institutions is generally not government insured, and PRC foreign-exchange controls may restrict transfers of funds outside China.
- The company disclosed that its disclosure controls and procedures were not effective as of March 31, 2021.
- PRC tax returns for 2018 through 2020 remain subject to examination. The company recorded $734,913 of current income tax expense for Q1 2021.
- No material legal proceedings were reported, and management stated that ordinary-course claims are not expected to materially affect financial position, results or liquidity.
Investor Verification Priorities
- Verify the issuer identity and corporate-name discrepancy between the request metadata and the filing, including the applicable ticker and reporting entity.
- Reconcile the $26.34 million net loss, including the $11.26 million disposal loss and $16.92 million stock-based employee compensation.
- Assess the sustainability and collectability of the $3.38 million Wuge revenue and the unusually high gross margin.
- Review the February 2021 offering, warrant terms, potential price protection provisions and resulting dilution.
- Evaluate the March 2021 disposal of Tongrong WFOE and Rong Hai, including the $2.46 million purchase price paid through cancellation of 426,369 shares.
- Review the Bitcoin-mining machine purchase agreement, cash funding requirements, cryptocurrency payment mechanics, profit thresholds and maximum potential share issuance.
- Investigate the disclosed ineffective disclosure controls and any remediation plan.
- Assess cash concentration, PRC fund-transfer restrictions, related-party balances and the company’s ability to finance operations without additional equity or debt.