Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 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 is a Nevada corporation operating primarily in China and reports coal, coke, steel and related materials trading through Rong Hai, and an Internet of Things and electronic-token gaming business through Wuge.
Financial Performance and Position
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 |
|---|---|---|---|---|
| Total revenue | $2.47 million | $3.77 million | $8.96 million | $16.70 million |
| Gross profit | $79,181 | $84,791 | $398,667 | $380,564 |
| Gross margin | 3.2% | 2.2% | 4.5% | 2.3% |
| Loss from continuing operations | $(343,157) | $(196,947) | $(831,538) | $(794,752) |
| Net income (loss) | $(491,876) | $134,456 | $6.47 million | $763,016 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $551,053 | $(1.59) million |
- Fuel-material revenue was $2.51 million in the third quarter and $8.96 million for the nine-month period. Equipment and systems revenue was zero.
- Third-quarter revenue declined 34.7% year over year; nine-month revenue declined 46.4%, primarily because of lower Rong Hai sales and reduced harbor cargo-handling revenue.
- Third-quarter SG&A expense increased 37.1% to $442,836, resulting in a $348,649 operating loss. Nine-month operating loss was $798,449.
- The nine-month net income was driven primarily by a $6.80 million gain on disposal of discontinued operations. Continuing operations remained loss-making.
- At September 30, 2020, total assets were $28.96 million, including $1.46 million of cash, $3.16 million of short-term investments, $1.58 million of accounts receivable, $1.43 million of inventory, $4.88 million of prepayments, $1.18 million of intangible assets and $14.90 million of goodwill.
- Current liabilities were $4.30 million, producing reported net working capital of approximately $8.30 million. Related-party payables were $729,295 and were unsecured, interest-free and due on demand.
- Debt consisted primarily of $455,206 of short-term bank loans maturing in January and March 2021, with interest rates of 4.5% and 5.22%, guaranteed by a shareholder’s personal property. Lease liabilities totaled $251,598.
- Investing cash outflows were $4.47 million, including approximately $1.14 million for intangible assets and $3.07 million for financial products. Financing cash inflows were $2.95 million, including $2.51 million from common-stock issuance and $443,326 from bank loans.
- Cash decreased by $1.02 million during the nine months, ending at $1.46 million. Management stated that current cash and operating cash flows should meet anticipated needs for at least the next twelve months, while acknowledging potential future needs for additional debt or equity financing.
Material Changes and Unusual Items
- On June 30, 2020, the company agreed to dispose of China Sunlong and related subsidiaries, including Wuhan HOST and Shengrong WFOE. The transaction was completed through cancellation of 1,012,932 company shares valued at $1.73 million. The disposed businesses are reported as discontinued operations.
- The disposal generated a $6.80 million gain for the nine-month period but a $151,318 loss in the third quarter, creating significant volatility in reported net income.
- On January 24, 2020, the company acquired and consolidated Wuge through contractual arrangements in exchange for 4 million shares. Wuge was a development-stage technology and gaming business and generated no separately disclosed revenue in the filing.
- Goodwill increased to $14.90 million, including approximately $7.43 million attributable to Wuge and $7.47 million attributable to Rong Hai. Goodwill represented approximately 51% of total assets at September 30, 2020.
- On August 11, 2020, the company issued 1,674,428 shares at $1.50 per share for gross proceeds of approximately $2.51 million. Shares outstanding increased to 29,176,026 at November 13, 2020.
- Foreign-currency translation generated $1.20 million of other comprehensive income in the third quarter and $496,479 for the nine-month period.
Outlook, Risks and Controls
- Management did not provide quantitative revenue or earnings guidance.
- Management attributed weaker sales to COVID-19-related shutdowns and customer disruption and stated that the ultimate duration and financial impact could not be reasonably estimated.
- Customer concentration is significant: one customer represented 99.4% of revenue for both the quarter and nine-month period. Two customers represented 96.8% of accounts receivable at September 30, 2020, and one customer represented all customer advances.
- The company is exposed to coal-price, shipping-cost, macroeconomic, customer-loss, supplier-concentration, credit, liquidity, foreign-exchange and PRC regulatory risks. Cash held in PRC financial institutions is generally not government insured.
- Rong Hai and Wuge are consolidated variable-interest entities under contractual arrangements rather than direct equity ownership. The arrangements may be affected by PRC legal and regulatory restrictions.
- Approximately $2.02 million of net assets of Tongrong WFOE, Wuge and Rong Hai were subject to PRC restrictions on transfers to the parent.
- The company disclosed that its disclosure controls and procedures were not effective as of September 30, 2020. No material changes in internal control over financial reporting were reported during the quarter.
- Subsequent to quarter-end, the President and Vice President resigned effective October 29, 2020; Wei Xu was appointed President.
- The company disclosed no material legal proceedings, but noted a potential $431,129 unpaid balance related to land-use rights if the PRC government seeks collection.
Investor Verification Items
- Confirm the issuer identity and ticker, because the supplied metadata names GD Culture Group Ltd while the filing names Code Chain New Continent Limited and ticker CCNC.
- Separate recurring operating performance from the $6.80 million discontinued-operation disposal gain and assess the continuing operating loss.
- Verify the sustainability and collectability of revenue given the 99.4% single-customer concentration and significant receivable concentration.
- Review the valuation, impairment testing and acquisition accounting for the $14.90 million goodwill balance, particularly the Wuge goodwill.
- Assess the liquidity impact of cash of $1.46 million, short-term bank debt of $455,206, related-party payables and restricted PRC subsidiary assets.
- Review the ineffective disclosure controls, VIE contractual structures, PRC fund-transfer restrictions and foreign-exchange exposure.
- Confirm the status and terms of the January and March 2021 bank-loan maturities and the company’s ability to fund operations without further equity or debt issuance.