UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| 7(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| No 119 South Zhaojuesi Road |
| |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including
area code:
Not applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May
16, 2022, there were
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that may be deemed to be “forward-looking statements” within the meaning of the federal securities laws. These statements relate to anticipated future events, future results of operations and or future financial performance. In some cases, you can identify forward-looking statements by their use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “ought to,” “plan,” “possible,” “potentially,” “predicts,” “project,” “should,” “will,” “would,” negatives of such terms or other similar terms. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements relating to:
| ● | our goals and strategies; | |
| ● | our future business development, results of operations and financial condition; | |
| ● | our estimates regarding expenses, future revenues, capital requirements and our need for additional financing; | |
| ● | our estimates regarding the market opportunity for our services; | |
| ● | the impact of government laws and regulations; | |
| ● | our ability to recruit and retain qualified personnel; | |
| ● | our failure to comply with regulatory guidelines; | |
| ● | uncertainty in industry demand; | |
| ● | general economic conditions and market conditions in the financial services industry; | |
| ● | future sales of large blocks or our securities, which may adversely impact our share price; and | |
| ● | depth of the trading market in our securities. |
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those described in Item 1A “Risk Factors” of our Annual Report of Form 10-K for the fiscal year ended December 31, 2021 and elsewhere in this Quarterly Report on Form 10-Q.
You should not unduly rely on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q, to conform these statements to actual results or to changes in our expectations.
ii
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Other receivables, net | ||||||||
| Other receivable - related party | ||||||||
| Inventories | ||||||||
| Prepayments | - | |||||||
| Total current assets | ||||||||
| PLANT AND EQUIPMENT, NET | ||||||||
| RIGHT-OF-USE ASSETS | ||||||||
| OTHER ASSETS | ||||||||
| Prepayments for purchases of equipment | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax assets | - | |||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short term loans - bank | $ | $ | ||||||
| Accounts payable | ||||||||
| Other payables and accrued liabilities | ||||||||
| Other payables - related parties | ||||||||
| Customer deposits | ||||||||
| Lease liabilities - current | ||||||||
| Taxes payable | ||||||||
| Total current liabilities | ||||||||
| OTHER LIABILITIES | ||||||||
| Lease liabilities – non-current | ||||||||
| Total other liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Stock subscriptions receivable | ( | ) | ( | ) | ||||
| (Accumulated deficit) retained earnings | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
1
CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | ||||||||
| Wuge digital door signs | $ | $ | ||||||
| TOTAL REVENUES | ||||||||
| COST OF REVENUES | ||||||||
| Wuge digital door signs | ||||||||
| TOTAL COST OF REVENUES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES (INCOME) | ||||||||
| Selling, general and administrative | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income (expense), net | ||||||||
| Total other income (expense), net | ||||||||
| LOSS BEFORE INCOME TAXES FROM CONTINUING OPERATIONS | ( | ) | ||||||
| PROVISION FOR INCOME TAXES | ||||||||
| LOSS FROM CONTINUING OPERATIONS | ( | ) | ||||||
| Discontinued operations: | ||||||||
| Income from discontinued operations, net of taxes | ||||||||
| (Loss) gain on disposal, net of taxes | ( | ) | ||||||
| Net (loss) income | ( | ) | ||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| COMPREHENSIVE (LOSS) INCOME | $ | $ | ( | ) | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES | ||||||||
| Basic and diluted | ||||||||
| Loss per share from continuing operations | ||||||||
| Basic and diluted | ( | ) | ||||||
| (Loss) / earnings per share from discontinued operations | ||||||||
| Basic and diluted | ( | ) | ||||||
| (Loss) / earnings per share available to common shareholders | ||||||||
| Basic and diluted | $ | $ | ( | ) | ||||
2
CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||
| Additional | Retained Earnings | Accumulated Other | ||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Statutory | Comprehensive | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Reserves | Unrestricted | Income (Loss) | Total | ||||||||||||||||||||||||||||
| BALANCE, January 1, 2021 | ||||||||||||||||||||||||||||||||||||
| Net income | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of shares for cash | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for employee compensation | ||||||||||||||||||||||||||||||||||||
| The cancellation of the common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| BALANCE, March 31, 2021 (Unaudited) | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| For the Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Additional | Stock | Retained Earnings | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Subscription | Statutory | Comprehensive | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivable | Reserves | Unrestricted | Income (Loss) | Total | |||||||||||||||||||||||||||||||
| BALANCE, January 1, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ||||||||||||||||||||||||||||||||||||||
| The cancellation of the common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Stock subscription receivable from issuance of common stock | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||||||||||
| BALANCE, March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||
3
CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation of plant and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Issuance of common stock for employee compensation | - | |||||||
| Disposal of the company | - | |||||||
| Change in operating assets and liabilities | ||||||||
| Notes receivable | - | |||||||
| Accounts receivables | - | ( | ) | |||||
| Other receivables | ||||||||
| Other receivable - related party | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepayments | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Other payables and accrued liabilities | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||
| Lease liabilities | ( | ) | ||||||
| Taxes payable | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net decrease in cash from disposal of discontinued operations | - | ( | ) | |||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock | - | |||||||
| Proceeds from short-term loans - bank | - | |||||||
| Net cash provided by financing activities | - | |||||||
| EFFECT OF EXCHANGE RATE ON CASH | ( | ) | ||||||
| NET (DECREASE)/INCREASE IN CASH | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for income tax | $ | $ | - | |||||
| Cash paid for interest | $ | $ | ||||||
| NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES | ||||||||
| Issuance of common stock for employee compensation | $ | - | $ | |||||
| The cancellation of the common stock | ||||||||
| Initial recognition of right-of-use assets and lease liabilities | $ | $ | - | |||||
4
CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of business and organization
Code Chain New Continent Limited (“CCNC” or the “Company”), formerly known as TMSR Holding Company Limited and JM Global Holding Company is a Nevada holding company that has no material operation of its own. The Company’ subsidiaries, Citi Profit Investment Holding Limited (“Citi Profit”), TMSR Holdings Limited (“TMSR Holdings”), and Makesi IoT Technology (Shanghai) Co., Ltd. (“Makesi WFOE”) are also holding companies with material operations.
Makesi WFOE has a series of contractual arrangement with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) that established a VIE structure. Wuge is primarily engaged in the research, development and application of Internet of Things (IoT) and electronic tokens Wuge digital door signs. For accounting purposes, Makesi WFOE is the primary beneficiary of Wuge. Accordingly, under U.S. GAAP, CCNC treats Wuge as the consolidated affiliated entity and has consolidated Wuge’s financial results in CCNC’s financial statements.
Prior to March 30, 2021, CCNC had an indirect
subsidiary, Tongrong Technology (Jiangsu) Co., Ltd. (“Tongrong WFOE”), which is a holding company with no material operations.
Tongrong WFOE had a series of contractual arrangement with Jiangsu Rong Hai Electric Power Fuel Co.
The VIE structure involves unique risks to investors. The VIE agreements have not been tested in a court of law and the Chinese regulatory authorities could disallow this VIE structure, which would likely result in a material change in our operations and the value of our securities, including that it could cause the value of such securities to significantly decline or become worthless.
The accompanying consolidated financial statements reflect the activities of CCNC and each of the following entities:
| Name | Background | Ownership | |||
| Citi Profit BVI | ● | ||||
| ● | |||||
| TMSR HK | ● | ||||
| ● | |||||
| Makesi WFOE | ● | ||||
| ● | |||||
| Rong Hai1 | ● | ||||
| ● | |||||
| ● | |||||
| ● | |||||
| Wuge | ● | ||||
| ● | |||||
| 1 |
5
Contractual Arrangements
Rong Hai was and Wuge is controlled through contractual agreements in lieu of direct equity ownership by the Company or any of its subsidiaries. Such contractual arrangements consist of a series of five agreements, consulting services agreement, equity pledge agreement, call option agreement, voting rights proxy agreement, and operating agreement (collectively the “Contractual Arrangements”).
Material terms of each of the Rong Hai VIE Agreements are described below. The Company disposed Tongrong WFOE and Rong Hai as of March 31, 2021.
Consulting Services Agreement
This consulting services agreement took effect upon execution and shall remain in full force and effective until Rong Hai’s valid operation term expires. Tongrong WFOE may, at its discretion, decide to renew or terminate this consulting services agreement.
Equity Pledge Agreement.
Under the equity pledge agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, and the agreement to assign equity pledge agreement among Rong Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, the shareholders pledged all of their equity interests in Rong Hai to Tongrong WFOE to guarantee Rong Hai’s performance of relevant obligations and indebtedness under the consulting services agreement. In addition, the shareholders of Rong Hai have completed the registration of the equity pledge under the agreement with the competent local authority. If Rong Hai breaches its obligation under the consulting services agreement, Tongrong WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests.
This equity pledge agreement took effect upon execution and shall remain in full force and effective until Rong Hai and Tongrong WFOE’s satisfaction of all contractual obligations and settlement of all secured indebtedness. Upon Tongrong WFOE’s request, Rong Hai shall extend its operation period to sustain the effectiveness of this equity pledge agreement.
Call Option Agreement
Under the call option agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018 and the agreement to assign call option agreement among Rong Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, each of the shareholders of Rong Hai irrevocably granted to WFOE or its designee an option to purchase at any time, to the extent permitted under PRC law, all or a portion of his equity interests in Rong Hai. Also, Tongrong WFOE or its designee has the right to acquire any and all of its assets of Rong Hai. Without Tongrong WFOE’s prior written consent, Rong Hai’s shareholders cannot transfer their equity interests in Rong Hai, and Rong Hai cannot transfer its assets. The acquisition price for the shares or assets will be the minimum amount of consideration permitted under the PRC law at the time of the exercise of the option.
This call option agreement shall took effect upon execution. Rong Hai and Tongrong WFOE shall not terminate this call option agreement under any circumstances for any reason unless it is early terminated by Tongrong WFOE or by the requirements under the applicable laws. This call option agreement shall be terminated provided that all equity interest or assets under this option is transferred to Tongrong WFOE or its designee.
6
Voting Rights Proxy Agreement
Under the voting rights proxy agreement among Shengrong WFOE and the shareholders of Rong Hai dated November 30, 2018 and the agreement to assign voting rights proxy agreement among Rong Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, each shareholder of Rong Hai irrevocably appointed Shengrong WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of his equity interests in Rong Hai, including but limited to the power to vote on its behalf on all matters of Rong Hai requiring shareholder approval in accordance with the articles of association of Rong Hai.
The voting rights proxy agreement took effect upon execution of and shall remain in effect indefinitely for the maximum period of time permitted by law in consideration of Tongrong WFOE.
Operating Agreement
Pursuant to the operating agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018 and the agreement to assign operating agreement among Rong Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, Rong Hai and the shareholders of Rong Hai agreed not to enter into any transaction that could materially affect Rong Hai’s assets, obligations, rights or operations without prior written consent from Tongrong WFOE, including but not limited to the amendment of the articles of association of Rong Hai. Rong Hai and its shareholders agree to accept and follow our corporate policies provided by Tongrong WFOE in connection with Rong Hai’s daily operations, financial management and the employment and dismissal of Rong Hai’s employees. Rong Hai agreed that it should seek guarantee from Tongrong WFOE first if any guarantee is needed for Rong Hai’s performance of any contract or loan in the course of its business operation.
This operating agreement took effect upon execution and shall remain in full force and effective until Rong Hai’s valid operation term expires. Either party of Tongrong WFOE and Rong Hai shall complete approval or registration procedures for the extension of its business term three months prior to the expiration of its business term, for the purpose of the maintenance of the effectiveness of this operating agreement.
Material terms of each of the Wuge VIE Agreements are described below:
Technical Consultation and Services Agreement.
Pursuant to the technical consultation and services agreement between Wuge and Tongrong WFOE dated January 3, 2020, Tongrong WFOE has the exclusive right to provide consultation services to Wuge relating to Wuge’s business, including but not limited to business consultation services, human resources development, and business development. Tongrong WFOE exclusively owns any intellectual property rights arising from the performance of this agreement. Tongrong WFOE has the right to determine the service fees based on Wuge’s actual operation on a quarterly basis. This agreement will be effective as long as Wuge exists. Tongrong WFOE may terminate this agreement at any time by giving a 30 days’ prior written notice to Wuge.
Equity Pledge Agreement.
Under the equity pledge agreement among Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, Wuge Shareholders pledged all of their equity interests in Wuge to Tongrong WFOE to guarantee Wuge’s performance of relevant obligations and indebtedness under the technical consultation and services agreement. In addition, Wuge Shareholders will complete the registration of the equity pledge under the agreement with the competent local authority. If Wuge breaches its obligation under the technical consultation and services agreement, Tongrong WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. This pledge will remain effective until all the guaranteed obligations are performed or the Wuge Shareholders cease to be shareholders of Wuge.
Equity Option Agreement.
Under the equity option agreement among Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, each of Wuge Shareholders irrevocably granted to Tongrong WFOE or its designee an option to purchase at any time, to the extent permitted under PRC law, all or a portion of his equity interests in Wuge. Also, Tongrong WFOE or its designee has the right to acquire any and all of its assets of Wuge. Without Tongrong WFOE’s prior written consent, Wuge’s shareholders cannot transfer their equity interests in Wuge and Wuge cannot transfer its assets. The acquisition price for the shares or assets will be the minimum amount of consideration permitted under the PRC law at the time of the exercise of the option. This pledge will remain effective until all options have been exercised.
7
Voting Rights Proxy and Financial Support Agreement.
Under the voting rights proxy and financial support
agreement among Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, each Wuge Shareholder irrevocably appointed Tongrong
WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of
his equity interests in Wuge, including but not limited to the power to vote on its behalf on all matters of Wuge requiring shareholder
approval in accordance with the articles of association of Wuge. The proxy agreement is for a term of
As of the date of this report, the Company primary operations are focused on the Wuge business that is in the digital door sign space. All prior energy or industrial solid waste recycling and any comprehensive environmental solutions business have been discontinued and disposed. Substantially all of the Company’s primary operations are conducted in the PRC.
Note 2 – Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).
Principles of consolidation
The unaudited condensed financial statements of the Company include the accounts of CCNC and its wholly owned subsidiaries and VIE. All intercompany transactions and balances are eliminated upon consolidation.
8
Use of estimates and assumptions
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include the useful lives of intangible assets, deferred revenues and plant and equipment, impairment of long-lived assets, collectability of receivables, inventory valuation allowance, present value of lease liabilities and realization of deferred tax assets. Actual results could differ from these estimates.
Foreign currency translation and transaction
The reporting currency of the Company is the U.S. dollar. The Company in China conducts its businesses in the local currency, Renminbi (RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. The statement of income accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments included in accumulated
other comprehensive loss amounted to $
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
Investments
The Company purchases certain liquid short term investments such as money market funds and or other short term debt securities marketed by financial institutions. These investments are not insured against loss of principal. These investments are accounted for as financial instruments that are marked to fair market value at the end of each reporting period. For investments that are held to maturity debt instruments, which have short maturities, and limited risk profiles, amortized cost may be the best approximation of their fair value and used for such investments.
Accounts receivable, net
Accounts receivable include trade accounts due from customers. An allowance for doubtful accounts may be established and recorded based on management’s assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories are comprised of raw materials and work in progress and are stated at the lower of cost or net realizable value using the weighted average method in Wuge. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually and recognize an impairment charge against the inventory when the carrying value exceeds net realizable value. As of March 31, 2022 and December 31, 2021, no obsolescence and cost in excess of net realizable value were recognized.
9
Prepayments
Prepayments are funds deposited or advanced to outside vendors for future inventory or services purchases. As a standard practice in China, many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis. This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method after consideration of the estimated useful lives of the assets and estimated residual value. The estimated useful lives and residual value are as follows:
| Useful Life | Estimated Value | |||||
| Building | | % | ||||
| Office equipment and furnishing | % | |||||
| Production equipment | % | |||||
| Automobile | % | |||||
| Leasehold improvements | % | |||||
The cost and related accumulated depreciation and amortization of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of income and comprehensive income. Expenditures for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Intangible assets
Intangible assets represent land use rights and patents, and they are stated at cost, less accumulated amortization. Research and development costs associated with internally developed patents are expensed when incurred. Amortization expense is recognized on the straight-line basis over the estimated useful lives of the assets. All land in the PRC is owned by the government; however, the government grants “land use rights.” The Company has obtained the rights to use various parcels of land. The patents have finite useful lives and are amortized using a straight-line method that reflects the estimated pattern in which the economic benefits of the intangible asset are to be consumed. The Company amortizes the cost of the land use rights and patents, over their useful life using the straight-line method. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The estimated useful lives are as follows:
| Useful Life | ||
| Land use rights | ||
| Patents | ||
| Software |
Goodwill
Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of income. Impairment losses on goodwill are not reversed.
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Impairment for long-lived assets
Long-lived assets, including plant, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values.
Fair value measurement
The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities, customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Customer deposits
Wuge typically receives customer deposits for services to be rendered from its customers. As Wuge delivers the services, it will recognize these deposits to results of operations in accordance to its revenue recognition policy.
Revenue recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue, other than retainage revenues, was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the Company’s retainage revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.
The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are primarily recognized at a point in time.
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The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition except its retainage revenues.
An entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but does not control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is entitled to retain in the exchange.
Revenues from digital doors signs are recognized
at a point in time when legal title and control over the sign is transferred to the customer. Management has determined that for the sales
of digital door signs there is a single performance obligation that is met when the aforementioned control is transferred. Typically,
customers make payment for the product in advance; the Company will record the payment as contract liabilities under the liability account
customer deposits until the Company delivers the product by transferring control. Such revenues are recognized at a point in time after
all performance obligations are satisfied under the new five-step model. The Company recognized $
Payments received prior to the relevant criteria for revenue recognition are met, are recorded as customer deposits.
The Company’s disaggregate revenue streams are summarized as follows:
For the | ||||||||
| 2022 | 2021 | |||||||
| Revenues – Wuge digital door signs | $ | $ | ||||||
| Total revenues | $ | $ | ||||||
Research and Development (“R&D”) Expenses
Research and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in the selling, general and administrative expenses.
Income taxes
The Company accounts for income taxes in accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred taxes is accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than
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Earnings per share
Basic earnings per share are computed by dividing
income available to common shareholders of the Company by the weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if securities or other contracts to issue common shares were exercised
and converted into common shares.
Recently issued accounting pronouncements
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
Note 3 – Business combination and restructuring
Wuge
On January 3, 2020, the Company entered into a
share purchase agreement with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) and all the shareholders of Wuge (“Wuge
Shareholders”). Pursuant to the share purchase agreement, the Company agreed to issue an aggregate of
The Company’s acquisition of Wuge was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Wuge based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Other current assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.
13
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition of Wuge based on a valuation performed by an independent valuation firm engaged by the Company:
| Total consideration at fair value | $ |
| Fair Value | ||||
| Cash | $ | |||
| Other current assets | ||||
| Plant and equipment | ||||
| Other noncurrent assets | ||||
| Goodwill | ||||
| Total asset | ||||
| Total liabilities | ( | ) | ||
| Net asset acquired | $ | |||
Approximately $
Note 4 – Variable interest entity
On November 30, 2018, Tongrong WFOE entered into Contractual Arrangements with Rong Hai and its shareholders upon executing of the “Purchase Agreement”. The significant terms of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the Company classifies Rong Hai as VIE.
On January 3, 2020, Tongrong WFOE entered into Contractual Arrangements with Wuge and its shareholders upon executing of the “Purchase Agreement”. The significant terms of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the Company classifies Wuge as VIE.
On January 11, 2021, Makesi WFOE entered into a series of assignment agreements (the “Assignment Agreements”) with Tongrong WFOE, Wuge and Wuge Shareholders, pursuant to which Tongrong WFOE assign all its rights and obligations under the VIE Agreements to Makesi WFOE (the “Assignment”). The VIE Agreements and the Assignment Agreements grant Makesi WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Wuge, including absolute rights to control the management, operations, assets, property and revenue of Wuge. The Assignment does not have any impact on Company’s consolidated financial statements.
On March 30, 2021, the Company entered into a
share purchase agreement with a buyer unaffiliated with the Company (the “Buyer”), and Qihai Wang, former director of the
Company (the “Payee”). Pursuant to the agreement, the Company agreed to sell and the Buyer agreed to purchase all the issued
and outstanding ordinary shares (the “Tongrong Shares”) of Tongrong WFOE. The Payee agreed to be responsible for the payment
of the purchase price on behalf of Buyer. The purchase price for the Tongrong Shares shall be $
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Makesi WFOE is deemed to have a controlling financial interest and be the primary beneficiary of Wuge because it has both of the following characteristics:
| (1) | The power to direct activities at Wuge that most significantly impact such entity’s economic performance, and |
| (2) | The obligation to absorb losses of, and the right to receive benefits from Wuge that could potentially be significant to such entity. |
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Accordingly, the accounts of Wuge are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, Its financial positions and results of operations are included in the Company’s consolidated financial statements beginning on January 3, 2020.
The carrying amount of the VIE’s assets and liabilities are as follows:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Current assets | $ | $ | ||||||
| Property, plants and equipment | ||||||||
| Other noncurrent assets | ||||||||
| Goodwill | ||||||||
| Total assets | ||||||||
| Current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Net assets | $ | $ | ||||||
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Other payables and accrued liabilities | ||||||||
| Other payables – related party | ||||||||
| Tax payables | ||||||||
| Customer Advances | ||||||||
| Lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities - noncurrent | ||||||||
| Total liabilities | $ | $ | ||||||
The summarized operating results of the VIE’s are as follows:
| For the three months ended March 31, | ||||
| 2022 | ||||
| Operating revenues | $ | |||
| Gross profit | ||||
| Income from operations | ||||
| Net income | $ | |||
Note 5 – Inventories
Inventories consist of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Raw materialsc | $ | $ | ||||||
| Finished Goods | ||||||||
| Total inventories | $ | $ | ||||||
15
Note 6 – Plant and equipment, net
Plant and equipment consist of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Office equipment and furniture | $ | $ | ||||||
| Automobile | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation expense for the three months ended
March 31, 2022 and 2021 amounted to $
Note 7 – Intangible assets, net
Intangible assets consist of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Development of technology | $ | $ | ||||||
| Software | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Net intangible assets | $ | $ | ||||||
Amortization expense for the three months ended
March 31, 2022 and 2021 amounted to $
Note 8 – Goodwill
The changes in the carrying amount of goodwill by business units are as follows:
| Wuge | Total | |||||||
| Balance as of December 31, 2021 | $ | $ | ||||||
| Disposal of the company | ||||||||
| Balance as of March 31, 2022 | $ | $ | ||||||
Note 9 – Related party balances and transactions
Related party balances
| a. | Other receivable – related party: |
| Name of related party | Relationship | March 31, 2022 | December 31, 2021 | |||||||
| $ | $ | |||||||||
| 98,005 | ||||||||||
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The Company advanced funds to the related party for technical services.
| b. | Other payables – related parties: |
| Name of related party | Relationship | March 31, 2022 | December 31, 2021 | |||||||
| $ | $ | |||||||||
| - | - | |||||||||
| $ | $ | |||||||||
The above payables represent interest free loans and advances. These loans and advances are unsecured and due on demand.
Note 10 – Taxes
Income tax
United States
CCNC was organized in the state of Delaware in
April 2015 and re-incorporated in the state of Nevada in June 2018. CCNC’s U.S. net operating loss for the nine months ended September
30, 2021 amounted to approximately $
On December 22, 2017, the “Tax Cuts and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States. Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21%. The 2017 Tax Act imposed a global intangible low-taxed income tax (“GILTI”), which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. The Company determined that there are no impact of GILTI for the nine months ended September 30, 2021 and 2020, which the Company believes that it will be imposed a minimum tax rate of 10.5% and to the extent foreign tax credits are available to reduce its US corporate tax, which may result in no additional US federal income tax being due.
Cayman Islands
China Sunlong is incorporated in the Cayman Islands and are not subject to tax on income or capital gains under current Cayman Islands law. In addition, upon payments of dividends by China Sunlong to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Citi Profit BVI is incorporated in the British Virgin Islands and are not subject to tax on income or capital gains under current British Virgin Islands law. In addition, upon payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
TMSR HK is incorporated in Hong Kong and are subject
to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant
Hong Kong tax laws. The applicable tax rate is
PRC
Makesi WFOE and Wuge are governed by the income
tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the
taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income
Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises are subject to income tax at a rate of
17
Deferred tax assets
Bad debt allowances must be approved by the Chinese tax authority prior to being deducted as an expense item on the tax return.
Significant components of deferred tax assets were as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| Net operating losses carried forward – U.S. | $ | $ | ||||||
| Net operating losses carried forward – PRC | ||||||||
| Bad debt allowance | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net | $ | $ | ||||||
Value added tax
Enterprises or individuals who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC laws. The
value added tax (“VAT”) standard rates are
Taxes payable consisted of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| VAT taxes payable | $ | $ | ||||||
| Income taxes payable | ||||||||
| Other taxes payable | ||||||||
| Total | $ | $ | ||||||
Note 11 – Leases
Effective January 1, 2019, the Company adopted
ASU 2016-02, “Leases” (Topic 842), and elected the package of practical expedients that does not require us to reassess: (1)
whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3)
initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the
lease and non-lease components of a lease as a single lease component. The impact of the adoption on January 1, 2019 increased the right-of-uses
and lease liabilities by approximately $
The Company had a conference room lease agreement
with a 2-year lease term starting in April 2020 until April 2022 , The Company had a staff quarter lease agreement with a 2-year
lease term starting in March 2021 until March 2023 and another staff quarter lease agreement with a 3-year lease term starting in July
2021 until July 2024. Upon adoption of ASU 2016-02, the Company recognized lease labilities of approximately $
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The weighted average remaining lease term of its
existing leases is
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For the three months ended March 31, 2022 and
2021, rent expenses amounted to $
The five-year maturity of the Company’s lease obligations is presented below:
| Twelve months ended December, 31 | Operating lease amount |
|||
| 2022 | $ | |
||
| 2023 | |
|||
| 2024 | |
|||
| Total lease payments | |
|||
| Less: interest | ( |
|||
| Present value of lease liabilities | $ | |
||
Note 12 – Concentration of risk
Credit risk
Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. As of March 31, 2022 and December
31, 2021, $
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Note 13 – Equity
Restricted net assets
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by Makesi WFOE only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the accompanying unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Makesi WFOE.
As a result of the foregoing restrictions, Makesi
WFOE and Wuge are restricted in their ability to transfer their net assets to the Company. Foreign exchange and other regulation in the
PRC may further restrict Makesi WFOE and Wuge from transferring funds to China Sunlong in the form of dividends, loans and advances. As
of March 31, 2022 and December 31, 2021, amounts restricted are the net assets of Makesi WFOE and Wuge which amounted to $
19
Common stock
On February 22, 2021, pursuant to a securities
purchase agreement (the “Purchase Agreement”) with two institutional investors, the Company , closed (a) a registered direct
offering (the “Registered Direct Offering”) for
On February 23, 2021,
On June 1, 2021, the Company issued to a designee
of the Seller
On July 28, 2021,
20
Warrants and options
On July 29, 2015, the Company sold
The sponsor of the Company purchased, simultaneously
with the closing of the Public Offering on July 29, 2015,
In July 2016, the board of directors of the Company
appointed two new directors. In August 2016, the sponsor of the Company granted an option to each of the two new directors to acquire
The aforementioned warrants and options are deemed to be effective on February 6, 2018, the date of the consummation of its initial business combination with China Sunlong, as the Company was deemed to be the accounting acquiree in the transaction and the transaction was treated as a recapitalization of China Sunlong.
The summary of warrant activity is as follows:
| Exercisable Into |
Weighted Average |
Average Remaining |
||||||||||||||
| Warrants | Number of | Exercise | Contractual | |||||||||||||
| Outstanding | Shares | Price | Life | |||||||||||||
| December 31, 2021 | $ | |||||||||||||||
| Granted/Acquired | $ | - | ||||||||||||||
| Forfeited | $ | - | ||||||||||||||
| Exercised | - | |||||||||||||||
| March 31, 2022 | $ | |||||||||||||||
The summary of option activity is as follows:
| Weighted | Average | |||||||||||
| Average | Remaining | |||||||||||
| Options | Exercise | Contractual | ||||||||||
| Outstanding | Price | Life | ||||||||||
| December 31, 2021 | $ | |||||||||||
| Granted/Acquired | $ | - | ||||||||||
| Forfeited | $ | - | ||||||||||
| Exercised | $ | - | ||||||||||
| March 31, 2022 | $ | |||||||||||
Note 14 – Commitments and contingencies
Contingencies
From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.
21
Note 15 – Segment reporting
The Company follows ASC 280, Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance. The Company’s chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income from operations.
The Company’s remain business segment and operations is Wuge. The Company’s consolidated results of operations and consolidated financial position from continuing operations are almost all attributable to Wuge; accordingly, management believes that the consolidated balance sheets and statement of operations provide the relevant information to assess Wuge’s performance.
The following represents assets by division as of:
| Total assets as of | March 31, 2022 | December 31, 2021 | ||||||
| Wuge | $ | $ | ||||||
| CCNC, Citi Profit BVI ,TMSR HK and Makesi WFOE | ||||||||
| Total Assets | $ | $ | ||||||
| Total revenues of | March 31, 2022 | March 31, 2021 | ||||||
| Wuge | $ | $ | ||||||
| CCNC, Citi Profit BVI ,TMSR HK and Makesi WFOE | ||||||||
| - | - | |||||||
| Total revenues | $ | $ | ||||||
Note 16 – Discontinued Operations
The following depicts the financial position for the discounted operations of Tongrong WOFE and Rong Hai as of March 31, 2022 and December 31, 2021, and the result of operations for the discounted operations of Tongrong WOFE and Rong Hai for the three months ended March 31, 2022 and 2021.
| Results of Operations | For the three months ended March 31, 2022 |
For the three months ended March 31, 2021 |
||||||
| REVENUES | ||||||||
| Fuel materials | $ | $ | ||||||
| TOTAL REVENUES | ||||||||
| COST OF REVENUES | ||||||||
| Fuel materials | ||||||||
| TOTAL COST OF REVENUES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES (INCOME) | ||||||||
| Selling, general and administrative | ||||||||
| Provision for (recovery of) doubtful accounts | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| INCOME FROM OPERATIONS | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest income | ||||||||
| Interest expense | ( |
) | ||||||
| Investment income | ||||||||
| Other income (expense), net | ||||||||
| Total other income (expense), net | ( |
|||||||
| INCOME BEFORE INCOME TAXES | ||||||||
| PROVISION FOR INCOME TAXES | ||||||||
| NET INCOME | $ | $ | ||||||
22
Note 17 – Subsequent events
On April 5, 2022, approved by the Board of Directors, the Compensation Committee and the Nominating and Corporate Governance Committee, Mr. Tianxiang Zhu was appointed as the Chief Operating Officer and a director of the Company to replace Mr. Jianan Liang, effective April 5, 2022.
On April 14, 2022, the Company entered into a Share Purchase Agreement (“SPA”) with Shanghai Yuanma Food and Beverage Management Co., Ltd., a PRC company (“Yuan Ma”), and all the shareholders of Yuan Ma (“Yuanma Shareholders”). Yuanma Shareholders are Wei Xu, the Chief Executive Officer and Chairman of the Board of the Company, and Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu.
Pursuant to the SPA, the Company
agreed to issue an aggregate of
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with our unaudited condensed financial statements, and the notes to those unaudited condensed financial statements that are included elsewhere in this Report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview
Code Chain New Continent Limited (“CCNC”, formerly known as JM Global Holding Company and TMSR Holding Company Limited) is a holding company incorporated in the State of Nevada with no material operations of its own. We currently conduct business through Wuge Network Games Co., Ltd. (“Wuge”). For accounting purposes, Makesi WFOE is the primary beneficiary of Wuge. Accordingly, under U.S. GAAP, CCNC treats Wuge as the consolidated affiliated entity and has consolidated Wuge’s financial results in CCNC’s financial statements. The VIE structure involves unique risks to investors. The VIE agreements have not been tested in a court of law and the Chinese regulatory authorities could disallow this VIE structure, which would likely result in a material change in our operations and the value of our securities, including that it could cause the value of such securities to significantly decline or become worthless.
Prior to March 30, 2021, we were also engaged in coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap through Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a then VIE of the Company. On March 30, 2021, the Company entered into a share purchase agreement with a buyer unaffiliated with the Company (the “Buyer”), and Qihai Wang, former director of the Company (the “Payee”). Pursuant to the agreement, the Company agreed to sell and the Buyer agreed to purchase all the issued and outstanding ordinary shares (the “Tongrong Shares”) of Tongrong Technology (Jiangsu) Co., Ltd. (“Tongrong WFOE”), a PRC company and an indirect subsidiary of the Company. The Payee agreed to be responsible for the payment of the purchase price on behalf of Buyer. On March 31, 2021, the Company closed the sale of the Tongrong Shares and caused the CCNC Shares to be cancelled. Tongrong WFOE had a series of VIE agreements with Rong Hai and the shareholders of Rong Hai. The sale of Tongrong Shares included disposition of Rong Hai. As a result, as of March 31, 2021, operations of Tongrong WFOE and Rong Hai have been designated as discontinued operations.
Key Factors that Affect Operating Results
Wuge’s growth strategy is substantially dependent upon our ability to market our intended products and services successfully to prospective clients in China. This requires that we heavily rely upon our development and marketing partners. Failure to select the right development and marketing partners will significantly delay or prohibit our ability to develop our intended products and services, market the products and gain market acceptance. Our intended products and services may not achieve significant market acceptance. If acceptance is achieved, it may not be sustained for any significant period of time. Failure of our intended products and services to achieve or sustain market acceptance could have a material adverse effect on our business, financial conditions and the results of our operations.
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Wuge may never gain significant acceptance in the marketplace and, therefore, may never generate substantial revenue or allow us to achieve or maintain profitability. Widespread adoption of Code Chain technology and IoT services in China depends on many factors, including acceptance by users that such systems and methods or other options. Our ability to achieve commercial market acceptance for Wuge or any other future products also depends on the strength of our sales, marketing and distribution organizations.
The threats to network and data security are increasingly diverse and sophisticated. Despite our efforts and processes to prevent breaches, Wuge’s products devices and those of third parties that we use in our operations are vulnerable to cyber security risks, including cyber attacks such as viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with our servers and computer systems or those of third parties that we use in our operations, which could lead to interruptions, delays, loss of critical data, and loss of consumer confidence.
In addition, we may be the target of email scams that attempt to acquire sensitive information or company assets. Despite our efforts to create security barriers to such threats, we may not be able to entirely mitigate these risks. Any cyber attack that attempts to obtain our data and assets, disrupt our service, or otherwise access our systems, or those of third parties we use, if successful, could adversely affect our business, operating results, and financial condition, be expensive to remedy, and damage our reputation.
The technology industries involving IoT devices, software and services are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Much of this litigation involves patent holding companies or other adverse patent owners who have no relevant product revenues of their own, and against whom our own patent portfolio may provide little or no deterrence.
We cannot assure you that we, our subsidiaries or the variable interest entities will prevail in any future intellectual property infringement or other litigation given the complex technical issues and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays, or require us or our subsidiaries to enter into royalty or licensing agreements. In addition, we, our subsidiaries or the variable interest entities could be obligated to indemnify our customers against third parties’ claims of intellectual property infringement based on our products or solutions. If our products or solutions violate any third-party intellectual property rights, we could be required to withdraw them from the market, re-develop them or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-develop our products or solutions, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and operating results. Withdrawal of any of our products or solutions from the market could harm our business, financial condition and operating results.
Coronavirus (COVID-19) Update
In December 2019, a novel strain of coronavirus causing respiratory illness (“COVID-19”) surfaced in Wuhan, China, spreading at a fast rate in January and February of 2020, and confirmed cases were also reported in other parts of the world. In reaction to this outbreak, an increasing number of countries imposed travel suspensions to and from China following the World Health Organization’s “public health emergency of international concern” announcement on January 30, 2020. Since this outbreak, business activities in China and many other countries including U.S. have been disrupted by a series of emergency quarantine measures taken by the government.
As a result, our operations in Chinahave been materially affected. Our office in Hubei Province, China were closed since the lockdown was enforced on January 23, 2020. The economic disruption caused by COVID-19 were catastrophic for the waste management business in Wuhan, which had no revenue and negative operating income since the fourth quarter of 2019 and no revenue or operating income for the first and second quarter of 2020. The waste management business lost employees, suppliers and customers and was notable to recover. As a result, we sold the waste management business located in Wuhan. In particular, on June 30, 2020, the Company disposed China Sunlong and its subsidiaries, including Shengrong Environmental Protection Holding Company Limited (“Shengrong BVI”), a British Virgin Islands company, Hong Kong Shengrong Environmental Company Limited (“Sunrong HK”), a Hong Kong company, Shengrong Environmental Protection Technology (Wuhan) Co., Ltd. (“Shengrong WFOE”), PRC company, and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a PRC company, pursuant to a share purchase agreement with Jiazhen Li, a former Chief Executive Officer of the Company, and Long Liao and Chunyong Zheng, former shareholders of Wuhan Host. Pursuant to the share purchase agreement, the Company sold 100% equity interests in China Sunlong to Jiazhen Li in exchange for forfeition and cancellation of all 1,012,932 shares of common stock of the Company held by Long Liao and Chunyong Zheng. In addition, our offices in Jiangsu Province and Sichuan Province in China were temporarily closed from early February until early March 2020.
The extent to which COVID-19 negatively impacts our business is highly uncertain and cannot be accurately predicted. We believe that the coronavirus outbreak and the measures taken to control it may have a significant negative impact on not only our business, but economic activities globally. The magnitude of this negative effect on the continuity of our business operation in China remains uncertain. These uncertainties impede our ability to conduct our daily operations and could materially and adversely affect our business, financial condition and results of operations, and as a result could adversely affect our stock price and create more volatility.
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Results of Operations
Three Months Ended March 31, 2022 vs. March 31, 2021
| Percentage | ||||||||||||||||
| 2022 | 2021 | Change | Change | |||||||||||||
| Revenues –Wuge digital door signs | $ | 7,616,615 | 3,380,559 | $ | 4,236,056 | 125.3 | % | |||||||||
| Total revenues | 7,616,615 | 3,380,559 | 4,236,056 | 125.3 | % | |||||||||||
| Cost of Revenues –Wuge digital door signs | 5,527,950 | 4,793 | 5,523,157 | 115233.8 | % | |||||||||||
| Total cost of revenues | 5,527,950 | 4,793 | 5,523,157 | 115233.8 | % | |||||||||||
| Gross profit | 2,088,665 | 3,375,766 | (1,287,101 | ) | (38.1 | )% | ||||||||||
| Operating expenses | 856,535 | 17,760,882 | (16,904,347 | ) | (95.2 | )% | ||||||||||
| Income (loss) from operations | 1,232,130 | (14,385,116 | ) | 15,617,246 | (108.6 | )% | ||||||||||
| Other income, net | 103,604 | 7,116 | 96,488 | 1355.9 | % | |||||||||||
| Income (loss) from continuing operations | 985,876 | (15,112,913 | ) | 16,098,789 | (106.5 | )% | ||||||||||
| Discontinued operations: | ||||||||||||||||
| Income from discontinued operations | - | 23,571 | (23,571 | ) | (100.0 | )% | ||||||||||
| Loss on disposal, net of taxes | - | (11,255,452 | ) | 11,255,452 | (100.0 | )% | ||||||||||
| Net Income(Loss) | 985,876 | (26,344,794 | ) | 27,330,670 | (103.7 | )% | ||||||||||
Revenues
The Company’s revenue consists of Wuge digital door signs. Total revenues increased by approximately $4.2 million, to approximately $7.6 million for the three months ended March 31, 2022, compared to approximately $3.4 million for the three months ended March 31, 2021. The increase was mainly due to the company’s increased effort in promoting the Wuge digital door signs.
Cost of Revenues
The Company’s cost of revenues consists of cost of Wuge digital door signs. Total cost of revenues increased by approximately $5.5 million, to approximately $5.5 million for the three months ended March 31, 2021, compared to approximately $4,793 for the same period in 2021. Our total cost of revenues increase was attributable to the Company’s general increase in revenue for Wuge digital door signs.
Gross Profit
The Company’s gross profit decreased by approximately $1.3 million, to approximately $2.1 million during the three months ended March 31, 2022, from approximately $3.4 for the three months ended March 31, 2021. The decrease was due to the increase in the sales of Wuge digital door signs.
Operating Expenses
The Company’s operating expenses include selling, general and administrative (“SG&A”) expenses, and recovery of doubtful accounts.
SG& A expenses decreased by approximately $16.9 million from approximately $17.8 million for the three months ended March 31, 2022 to approximately $0.9 million for the three months ended March 31, 2021. The decrease was mainly due to decreased employee compensation.
Income from Operations
As a result of the foregoing, income from operations for the three months ended March 31, 2022 was approximately $1.2 million, an increase of approximately $15.6 million, or approximately 108.6%, from approximately $14.4 million for the three months ended March 31, 2021. The increase was mainly due to decreased employee compensation.
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Net Income (Loss)
The Company’s net income increased by approximately $27.3 million, or 103.7%, to approximately $1.0 million net income for the three months ended March 31, 2022, from approximately $26.3 million net loss for the same period in 2022. The increase was mainly due to increase in the sales revenue of Wuge digital door signs.
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our unaudited condensed consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our unaudited condensed consolidated financial statements.
Cash and cash equivalents
The Company considers certain short-term, highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. Cash and cash equivalents primarily represent bank deposits and fixed deposits with maturities of less than three months.
Investments
The Company purchases certain liquid short term investments such as money market funds and or other short term debt securities marketed by large financial institutions. These investments are not insured against loss of principal. These investments are accounted for as financial instruments that are marked to fair market value at the end of each reporting period. As result of their short maturities, and limited risk profile, at times, their amortized carrying cost may be the best approximation their fair value.
Accounts receivable, net
Accounts receivable include trade accounts due from customers. An allowance for doubtful accounts may be established and recorded based on management’s assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories are comprised of raw materials, work in progress and finished goods and are stated at the lower of cost or net realizable value using the weighted average method in Wuge. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually and records a reserve against the inventory when the carrying value exceeds net realizable value.
Prepayments
Prepayments are funds deposited or advanced to outside vendors for future inventory purchases. As a standard practice in China, many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis. This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.
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Fair value measurement
The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by us. The Company considers the carrying amount of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities, customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Revenue recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue, other than warranty revenues, was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the Company’s warranty revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.
The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are primarily recognized at a point in time.
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition except its warranty revenues.
An entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but does not control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is entitled to retain in the exchange.
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Revenues from digital doors signs are recognized at a point in time when legal title and control over the sign is transferred to the customer. Management has determined that for the sales of digital door signs there is a single performance obligation that is met when the aforementioned control is transferred. Typically, customers make payment for the product in advance; the Company will record the payment as contract liabilities under the liability account customer deposits until the Company delivers the product by transferring control. Such revenues are recognized at a point in time after all performance obligations are satisfied under the new five-step model.
Payments received prior to the relevant criteria for revenue recognition are met, are recorded as customer deposits.
Gross versus Net Revenue Reporting
Starting from July 2016, in the normal course of the Company’s trading of industrial waste materials business, the Company directly purchases the processed industrial waste materials from the Company’s suppliers under the Company’s specifications and drop ships the materials directly to the Company’s customers. The Company would inspect the materials at its customers’ site, during which inspection it temporarily assumes legal title to the materials, and after which inspection legal title is transferred to its customers. In these situations, the Company generally collects the sales proceed directly from the Company’s customers and pay for the inventory purchases to the Company’s suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the new accounting guidance for principal-agent considerations. Since the Company is the primary obligor and is responsible for (i) fulfilling the processed industrial waste materials delivery, (ii) controlling the inventory by temporarily assume legal title to the materials after inspecting the products from our vendors before passing the materials to our customers, and (iii) bearing the back-end risk of inventory loss with respect to any product return from the Company’s customers, the Company has concluded that it is the principal in these arrangements, and therefore report revenues and cost of revenues on a gross basis.
Recently Issue Accounting Pronouncements
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We do not believe the adoption of this ASU would have a material effect on our consolidated financial statements.
We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
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Liquidity and Capital Resources
The Company has funded working capital and other capital requirements primarily by equity contributions, loans from shareholders, cash flow from operations, short term bank loans, loans from third parties and cash received from JM Global Holding Company through the reverse capitalization. Cash is required to repay debts and pay salaries, office expenses, income taxes and other operating expenses. As of March 31, 2022, our net working capital was approximately $0.3 million, over 3% of the Company’s current liabilities was from other payables – related parties due to major shareholders. Removing these liabilities, the Company had net working capital of $0.8 million and is expected to continue to generate cash flow from operations in the twelve months period.
We believe that current levels of cash and cash flows from operations will be sufficient to meet its anticipated cash needs for at least the next twelve months from the date the consolidated financial statements to be issued. However, it may need additional cash resources in the future if it experiences changed business conditions or other developments, and may also need additional cash resources in the future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed the Company’s amounts of cash and cash equivalents on hand, the Company may seek to issue debt or equity securities or obtain additional credit facility
The following summarizes the key components of the Company’s cash flows for the three months ended March 31, 2022 and 2021.
For the Three Months March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used in) provided by operating activities | $ | (2,462,442 | ) | $ | 394,702 | |||
| Net cash used in investing activities | (6,961 | ) | (1,188,796 | ) | ||||
| Net cash provided by financing activities | - | 22,794,575 | ||||||
| Effect of exchange rate change on cash | 79,292 | (84,193 | ) | |||||
| Net change in cash | $ | (2,390,111 | ) | $ | 21,916,288 | |||
As of March 31, 2022 and December 31, 2021, the Company had cash in the amount of $12,198,219 and $14,588,330, respectively. As of March 31, 2022 and December 31, 2021, $11,995,438 and $14,385,549 and were deposited with various financial institutions located in the PRC, respectively. As of March 31, 2022 and December 31, 2021, $202,781 and $202,781 were deposited with one financial institution located in the United States, respectively.
Operating activities
Net cash used in operating activities was approximately $2.5 million for the three months ended March 31, 2022, as compared to approximately $0.4 million net cash provided by operating activities for the three months ended March 31, 2021. Net cash provided by operating activities was mainly due to the decrease of approximately $0.2 million other receivable - related party, the increase of approximately $0.2 million of prepayments, and the decrease of approximately $4.2 million of customer deposits, and the increase of approximately $0.7 million of taxes payable.
Investing activities
Net cash used in investing activities was approximately $6,961 for the three months ended March 31, 2022, as compared to approximately $1.2 million net cash used in investing activities for the three months ended March 31, 2021. Net cash used in investing activities for the three months ended March 31, 2022 was due to approximately $6,961 spending on purchase of equipment.
Financing activities
Net cash provided by financing activities was approximately $0 for the three months ended March 31, 2022, as compared to approximately $22.8 million net cash used in financing activities for the nine months ended March 31, 2021. Net cash provided by financing activities for the three months ended March 31, 2022 was due to approximately $0.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
Credit risk is one of the most significant risks for the Company’s business.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. Cash held at major financial institutions located in the PRC are not insured by the government. While we believe that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company normally require prepayment from the customers prior to begin production or delivery products. The Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.
In measuring the credit risk of our sales to our customers, the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.
Liquidity Risk
The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.
Inflation Risk
The Company is also exposed to inflation risk. Inflationary factors, such as increases in raw material and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the selling prices of our products do not increase with such increased costs.
Foreign Currency Risk
A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officers, President and Chief Financial Officer (the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report.
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the information included in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 before making an investment in our common stock. Our business, financial condition, results of operations, or prospects could be materially and adversely affected if any of these risks occurs, and as a result, the market price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There are no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 14, 2022, the Company entered into a Share Purchase Agreement (“SPA”) with Shanghai Yuanma Food and Beverage Management Co., Ltd., a PRC company (“Yuan Ma”), and all the shareholders of Yuan Ma (“Yuanma Shareholders”). Yuanma Shareholders are Wei Xu, the Chief Executive Officer and Chairman of the Board of the Company, and Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu.
Pursuant to the SPA, the Company agreed to issue an aggregate of 7,680,000 shares of common stock of the Company (the “Shares”), valued at $1.00 per share, to the Yuanma Shareholders, in exchange for Yuanma Shareholders’ agreement to enter into and to cause Yuan Ma to enter into certain agreements (“VIE Agreements”) with Makesi IoT Technology (Shanghai) Co., Ltd. (“WFOE”), the Company’s indirectly owned subsidiary, to establish a VIE (variable interest entity) structure (the “Acquisition”). Through the VIE Agreements, WFOE will receive the economic benefits of Yuan Ma and, for accounting purposes, the Company will consolidate the financial results of Yuan Ma in the consolidated financial statements under generally accepted accounting principles in the U.S. (U.S. GAAP). The Company has also agreed to hold a special meeting of the stockholders of the Company as soon as possible in connection with the Acquisition. The closing of the Acquisition is conditioned on the approval of the stockholders of the Company and any required regulatory approval.None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
|
Exhibit |
Description | |
| 31.1 | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| 31.2 | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| 32.1 | Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. | |
| 32.2 | Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. | |
| 101.INS | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CODE CHAIN NEW CONTINENT LIMITED | ||
| Date: May 16, 2022 | By: | /s/ Wei Xu |
| Name: | Wei Xu | |
| Title: | Chief Executive Officer, President and | |
| Chairman of the Board | ||
| Date: May 16, 2022 | By: | /s/ Yi Li |
| Name: | Yi Li | |
| Title: | Chief Financial Officer and Secretary | |
| (Principal Financial Officer and Principal Accounting Officer) |
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