Business Context and Reporting Period
This unaudited Form 10-Q covers the three and six months ended June 30, 2021, filed August 12, 2021. The filing identifies the registrant as Code Chain New Continent Limited (CCNC), not GD Culture Group Ltd; investors should verify the requested company and filing identity.
The continuing business was primarily Wuge, a China-based technology business offering digital door signs and related IoT/e-commerce products through contractual arrangements with a variable interest entity. The Company disposed of Tongrong WFOE and its controlled Rong Hai coal-trading business on March 31, 2021, classifying those operations as discontinued.
Key Financial Metrics
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Revenue | $3.50 million | $6.88 million |
| Gross profit | $3.34 million | $6.72 million |
| Gross margin | 95.6% | 97.7% |
| Loss from operations | $5.79 million | $20.18 million |
| Loss from continuing operations | $3.23 million | $18.34 million |
| Net loss | $3.21 million | $29.55 million |
| Basic and diluted loss per share | $0.09 | $0.85 |
Revenue consisted almost entirely of Wuge digital door signs. Selling, general and administrative expense was $9.14 million in the quarter and $26.90 million year to date, including substantial employee compensation and other unusual costs. Other income included approximately $1.81 million of Bitcoin-related income in the quarter and $1.82 million year to date.
At June 30, 2021, cash and cash equivalents were $19.25 million, compared with $0.999 million at December 31, 2020. Total current assets were $28.58 million and current liabilities were $6.92 million, implying net working capital of approximately $21.65 million. The Company reported no bank loans or lease liabilities at June 30, 2021. Customer deposits were $5.67 million, and prepayments were $8.75 million.
Total assets were $45.11 million, including $7.75 million of goodwill, $3.05 million of intangible assets and $5.73 million of plant and equipment. Shareholders’ equity was $38.19 million, while accumulated deficit was $28.60 million.
For the six months, operating activities used $3.33 million of cash, investing activities used $1.21 million according to the cash flow statement, and financing activities provided $22.80 million, primarily from common-stock issuance. Ending cash increased by $18.25 million from the beginning of the year. The MD&A presents investing cash outflow as $0.52 million, which is inconsistent with the cash flow statement and should be reconciled.
Material Changes Versus Prior Comparable Period
- Quarterly revenue increased from $46,482 to $3.50 million; six-month revenue increased from $46,482 to $6.88 million, driven by Wuge digital door signs.
- Quarterly gross profit increased from $38,870 to $3.34 million, and six-month gross profit increased from $38,870 to $6.72 million.
- Operating losses expanded to $5.79 million for the quarter and $20.18 million for the six months, primarily because of increased SG&A and employee compensation.
- The Company shifted from a $6.77 million quarterly net income and $6.96 million six-month net income in 2020 to net losses of $3.21 million and $29.55 million, respectively.
- The six-month 2021 net loss included an $11.23 million loss on disposal of discontinued operations, compared with a $6.95 million gain in the prior-year period.
- Cash increased substantially through a $22.54 million common-stock issuance. Shares outstanding increased from 29.18 million at December 31, 2020 to 38.43 million at June 30, 2021.
- The Company issued 1.59 million shares for Bitcoin mining machines and 925,494 bonus shares, for a total of 2.51 million shares issued under the related asset purchase agreement.
Guidance, Outlook, Risks, Contingencies and Unusual Items
No formal revenue or earnings guidance was provided. Management stated that existing cash and expected operating cash flows should meet anticipated needs for at least the next twelve months, while noting that additional financing could be required for changed conditions, acquisitions or strategic investments.
On February 23, 2021, the Company agreed to acquire 10,000 Bitcoin mining machines for $6.16 million in stock. On June 1, 2021, it issued 925,494 bonus shares after reporting that profit benchmarks had been met. On July 28, 2021, after quarter-end, it agreed to acquire additional digital currency mining machines for approximately $16.44 million, payable in 7.65 million shares.
The Company also entered into a joint venture on June 1, 2021, intended to develop a digital energy and carbon-neutrality platform. The Company was to contribute $1.0 million and hold 51%.
Principal risks include dependence on the early-stage Wuge business, uncertain market acceptance of its products, cybersecurity and data-security threats, intellectual-property litigation, cryptocurrency and mining volatility, foreign-exchange restrictions, PRC regulatory and VIE-structure risks, concentration of cash in financial institutions, and potential dilution from equity financings, warrants, options and asset acquisitions.
The filing states that disclosure controls and procedures were not effective as of the evaluation date, and that no material changes to internal control over financial reporting occurred during the quarter. No material legal proceedings were reported. The filing also notes that substantially all primary operations are conducted in China and that PRC restrictions may limit transfers of funds to the parent.
Important Facts for Investors to Verify
- Confirm whether this filing relates to GD Culture Group Ltd or Code Chain New Continent Limited; the supplied filing names CCNC throughout.
- Reconcile the conflicting investing cash-flow amounts of $1.21 million in the financial statements and $0.52 million in MD&A.
- Assess the sustainability and collectability of the reported digital door-sign revenue, including the large gross margins and $5.67 million of customer deposits.
- Review the composition of the $26.90 million year-to-date SG&A expense, including employee compensation, bonuses and any listing-related costs.
- Validate the Bitcoin mining-machine acquisition, reported Bitcoin income, valuation of cryptocurrency intangible assets and the performance conditions for additional stock issuance.
- Evaluate dilution from the 38.43 million shares outstanding, 9.08 million warrants, 824,000 options and subsequent 7.65 million-share mining-machine transaction.
- Review the discontinued-operation accounting and the $11.23 million disposal loss, including the financial effects of selling Tongrong WFOE and Rong Hai.
- Assess the effectiveness of internal controls and the ability to move cash from PRC subsidiaries or VIEs to the parent.