Business Context and Reporting Period
Code Chain New Continent Limited, identified in the request as GD Culture Group Ltd, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The filing states that the registrant’s primary continuing business was Wuge, a China-based variable-interest entity focused on Internet of Things, electronic-token, and digital door-sign activities. The company’s legal name, ticker, and filing information should be reconciled with the requested company name.
The company disposed of Tongrong Technology and its controlled Rong Hai coal-trading business effective March 31, 2021. Rong Hai is presented as discontinued operations. The company also expanded into cryptocurrency mining and cloud-computing infrastructure.
Financial Performance and Position
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 |
|---|---|---|---|---|
| Revenue | $2.7 million | $(45,759) | $9.5 million | $723 |
| Gross profit | $2.6 million | $(50,470) | $9.3 million | $(11,600) |
| Gross margin | 98.5% | Not meaningful | 97.9% | Not meaningful |
| Loss from operations | $(3.2) million | $117,000 | $(23.4) million | $(764,000) |
| Loss from continuing operations | $(2.7) million | $119,000 income | $(21.0) million | $(758,000) |
| Net loss | $(2.6) million | $(492,000) | $(32.2) million | $6.5 million income |
| Basic and diluted EPS | $(0.07) | $(0.02) | $(0.90) | $0.23 |
- Revenue consisted almost entirely of Wuge digital door signs: $9.5 million for the first nine months, compared with none in the prior-year period.
- SG&A expense was $5.9 million in the third quarter and $32.7 million for the first nine months, compared with $571,000 and $752,000, respectively, in the prior-year periods. Management attributed the increase primarily to listing fees, employee compensation, bonuses, and other Wuge-related costs.
- Other income, net, was $2.4 million for the first nine months, including approximately $2.4 million related to Bitcoin revenue and other items as presented in the cash-flow and financial statement disclosures.
- At September 30, 2021, cash and cash equivalents were $8.4 million, versus $1.0 million at December 31, 2020. Total assets were $47.1 million and total liabilities were $11.5 million.
- Current assets were $30.9 million and current liabilities were $11.5 million, implying working capital of approximately $19.4 million. Prepayments were unusually high at $21.9 million, compared with $4.8 million at year-end.
- Customer deposits increased to $10.6 million from $901,000 at December 31, 2020. These deposits represent amounts received before the related revenue-recognition criteria are satisfied.
- The company reported no short-term bank loans or lease liabilities at September 30, 2021. Related-party payables were $466,000 and were unsecured, interest-free, and due on demand.
- Net cash used in operating activities was $14.6 million, compared with $551,000 of operating cash flow provided in the prior-year period. Financing activities provided $22.8 million, primarily from $22.5 million of common-stock issuance.
- Net cash used in investing activities was $95,000. Cash at period-end included $7.2 million held in PRC financial institutions and $1.2 million held in a U.S. financial institution.
Material Changes Versus the Prior Comparable Period
- The company moved from negligible prior-year revenue to $9.5 million of Wuge digital door-sign revenue for the first nine months of 2021.
- Despite the revenue increase, operating results deteriorated because operating expenses grew substantially faster than revenue. The nine-month operating loss increased by approximately $22.6 million.
- Net income of $6.5 million in the first nine months of 2020 changed to a $32.2 million net loss in 2021. The 2021 loss included an $11.2 million loss on disposal of discontinued operations, while the prior-year period included a $6.8 million gain on disposal.
- Common shares outstanding increased to 46.1 million at September 30, 2021 from 29.2 million at December 31, 2020. The increase reflected equity offerings, employee compensation, bonus shares, and shares issued for mining equipment.
- In February 2021, the company completed an offering that generated approximately $22.5 million of net proceeds before or after offering costs as disclosed in the filing, with the filing specifically reporting $25.0 million of gross proceeds.
- The company issued 2.5 million shares in June 2021 for 10,000 Bitcoin-mining machines and related bonus shares, and 7.6 million shares in July 2021 for additional digital-currency mining machines valued at approximately $16.4 million.
- Goodwill declined from $11.7 million to $7.8 million because $3.9 million associated with Rong Hai was removed upon disposal. Wuge goodwill remained $7.8 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal revenue, earnings, or cash-flow guidance. Management stated that existing cash and expected operating cash flows were believed to be sufficient for at least the next twelve months, while also noting that additional financing may be required for changing business conditions, investments, acquisitions, or strategic cooperation.
- The company agreed in September 2021 to purchase cloud-computing storage servers for approximately $15.9 million to support digital-currency mining operations. The filing text does not clearly state whether the transaction had closed or been reflected in the September 30 balance sheet.
- The Bitcoin-mining equipment agreement included performance-based bonus and additional share issuance provisions. The filing reports 925,494 bonus shares issued in June 2021 and caps shares issuable under that agreement at 19.99% of outstanding shares as of February 23, 2021.
- Cryptocurrency exposure includes Bitcoin recorded as an indefinite-lived intangible asset at approximately $2.4 million at September 30, 2021. Digital-currency prices, mining economics, equipment utilization, regulation, and access to power may materially affect future results.
- Substantially all primary operations were conducted in China. The company highlighted PRC restrictions on fund transfers, foreign-exchange risk, concentration of cash in PRC banks, and the possibility that PRC regulation could restrict the movement of funds or control over variable-interest entities.
- Wuge’s growth depends on market acceptance, development and marketing partners, and the successful commercialization of its technology. The filing also identifies cybersecurity, intellectual-property litigation, competition, personnel retention, COVID-19 disruption, customer and supplier concentration, and execution risks.
- The company reported 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.
- There were no reported legal proceedings considered material. PRC tax returns for 2018 through 2020 remained subject to examination, and the company maintained a full valuation allowance against its U.S. deferred tax assets.
- After quarter-end, the co-chief executive officer and chief strategy officer resigned effective October 6, 2021. The chief executive officer was appointed to the board effective October 7, 2021.
Most Important Facts for Investors to Verify
- Reconcile the requested GD Culture Group Ltd identity with the filing’s stated registrant, Code Chain New Continent Limited, ticker CCNC, and legal-name history.
- Verify the source, collectability, and sustainability of the $9.5 million of Wuge revenue and the unusually high reported gross margin.
- Review the $32.7 million of nine-month SG&A expense, including employee compensation, listing fees, bonuses, and any related-party or equity-settled amounts.
- Assess the liquidity impact of $14.6 million of operating cash burn, $21.9 million of prepayments, and $10.6 million of customer deposits.
- Confirm the status, valuation, delivery, operation, and profitability of the Bitcoin-mining machines and the $15.9 million cloud-server purchase.
- Evaluate dilution from 46.1 million shares outstanding, outstanding warrants and options, performance-based share issuances, and the $16.4 million mining-equipment share issuance.
- Review the discontinued-operations accounting and the $11.2 million disposal loss, including the effect on comparability of 2021 and 2020 results.
- Investigate the ineffective disclosure controls, VIE contractual arrangements, PRC fund-transfer restrictions, and the company’s ability to access cash held in China.