Business Context and Reporting Period
This Form 10-Q was filed by Code Chain New Continent Limited, formerly TMSR Holding Company Limited; the request identifies the company as GD Culture Group Ltd. The filing covers the quarter and six months ended June 30, 2020, with unaudited U.S. GAAP financial statements. The company’s continuing operations were primarily the coal, coke, steel and related materials wholesale business conducted through Rong Hai, plus the newly acquired Wuge mobile gaming, Internet of Things and electronic-token business. The former solid-waste recycling and coating-materials businesses were classified as discontinued operations following the June 30, 2020 sale of China Sunlong.
Key Financial Metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Revenue | $1.326 million | $6.492 million |
| Gross profit | $137,058; 10.3% margin | $319,486; 4.9% margin |
| Loss from continuing operations | $174,603 | $488,381 |
| Operating loss | $175,596; negative 13.2% margin | $449,800; negative 6.9% margin |
| Net income | $6.773 million | $6.959 million |
| Discontinued-operations gain | $6.952 million disposal gain | $6.952 million disposal gain |
| Basic and diluted EPS | $0.25 | $0.25 |
- Revenue consisted almost entirely of fuel materials: $1.280 million in the quarter and $6.445 million for the six months. Equipment and systems revenue was zero.
- Coal volume sold was 18,364 tons in the quarter at an average selling price of approximately $69.69 per ton, and 109,503 tons for the six months at approximately $58.86 per ton.
- Cash and cash equivalents were $1.940 million at June 30, 2020. Short-term investments were $3.037 million, producing reported current assets of $13.230 million against current liabilities of $5.691 million.
- Net working capital was approximately $7.5 million, according to management; excluding related-party payables, management reported approximately $8.2 million.
- Total assets were $28.858 million and total liabilities were $5.752 million. Shareholders’ equity was $23.107 million.
- Debt consisted of $437,884 of short-term bank loans, bearing interest rates of 4.5% and 5.22%, maturing in January and March 2021 and guaranteed by a shareholder’s personal property.
- Operating cash flow was $1.006 million for the six months, compared with cash used of $2.292 million in the prior-year period. Investing cash flow was negative $4.503 million, primarily from $1.139 million of intangible-asset purchases and $3.059 million of financial-product purchases. Financing cash flow was positive $3.014 million, including equity proceeds and bank-loan proceeds.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue declined 83.2% from $7.892 million to $1.326 million, while six-month revenue declined 49.8% from $12.925 million to $6.492 million.
- Second-quarter gross profit fell 35.3% to $137,058, although the gross margin increased to approximately 10.3% from 2.7% because revenue and cost mix changed. Six-month gross profit increased 8.0% to $319,486, while the gross margin increased to approximately 4.9% from 2.3%.
- Continuing operations remained loss-making, but the six-month operating loss improved from $561,904 to $449,800 and the loss from continuing operations improved from $621,749 to $488,381.
- Reported net income increased sharply because of the $6.952 million gain on the disposal of China Sunlong and its subsidiaries. The gain was not generated by continuing operations.
- Wuge was acquired in January 2020 for 4 million shares valued at $7.2 million. The acquisition added approximately $7.1 million of goodwill and $1.13 million of intangible assets, but the filing does not report material Wuge revenue for the period.
- Common shares outstanding increased to 28.515 million at June 30, 2020 from 20.822 million at December 31, 2019, primarily reflecting the Wuge acquisition and equity issuance for cash. Approximately 30.189 million shares were outstanding as of August 12, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing cash and operating cash flows were expected to satisfy anticipated needs for at least the next twelve months, but additional debt or equity financing could be required for changed conditions, investments or acquisitions.
- COVID-19 temporarily closed offices and production facilities beginning in February 2020 and reduced customer demand. Management stated that the duration and financial impact of continued disruption could not be reasonably estimated.
- Revenue and receivables were highly concentrated. One customer represented 98.3% of second-quarter revenue and 99.3% of six-month revenue; two customers represented 96.1% of accounts receivable at June 30, 2020.
- The company is exposed to Chinese economic and regulatory conditions, coal-price and shipping-price volatility, customer and supplier concentration, foreign-exchange restrictions, credit risk, liquidity risk and inflation.
- Operations and assets are primarily located in China. Cash held in Chinese financial institutions is not insured by the government, and PRC restrictions may limit transfers of funds to the parent.
- Related-party payables totaled $641,570 and were described as unsecured, interest-free and due on demand. Certain VIE-related balances and contractual arrangements may expose investors to PRC legal and enforcement risks.
- Management concluded that disclosure controls and procedures were not effective as of June 30, 2020.
- The company disclosed a possible $431,129 unpaid balance for land-use rights if the local government seeks collection. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
- After quarter-end, on August 11, 2020, the company issued 1,674,428 shares at $1.50 per share for gross proceeds of approximately $2.51 million.
Most Important Facts to Verify
- Verify the issuer identity because the filing names Code Chain New Continent Limited and the request names GD Culture Group Ltd.
- Separate the $6.952 million disposal gain from recurring earnings; continuing operations generated a six-month loss of $488,381.
- Assess the sustainability and collectability of revenue given the extreme customer concentration and the sharp year-over-year revenue decline.
- Review the valuation and impairment risk of $14.329 million of goodwill, including approximately $7.146 million attributed to Wuge and $7.183 million attributed to Rong Hai.
- Reconcile reported cash balances and cash-flow disclosures, including the different December 31, 2019 cash amounts presented in the financial statements and MD&A.
- Evaluate dilution from the 28.515 million shares outstanding at quarter-end, the subsequent 1.674 million-share issuance, 9.079 million warrants and 824,000 options.
- Review the remediation status of ineffective disclosure controls and the legal, regulatory and enforceability risks associated with PRC VIE structures.