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CCNC Code Chain New Continent

Filed: 22 Nov 21, 5:00pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-37513

 

CODE CHAIN NEW CONTINENT LIMITED

(Exact name of registrant as specified in its charter)

 

Nevada 47-3709051
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification Number)

 

No 119 South Zhaojuesi Road

2nd Floor, Room 1

Chenghua District, Chengdu, Sichuan, China

 

 

610047

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: +86 028-84112941

 

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. Yes   No

 

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). Yes   No

 

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 filerAccelerated filer
Non-accelerated filerSmaller 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 October 31, 2021, there were 46,077,110 shares of the Company’s common stock issued and outstanding.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.0001 CCNC Nasdaq Capital Market

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION 1
     
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 1
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
     
ITEM 4. CONTROLS AND PROCEDURES 39
     
PART II. OTHER INFORMATION 40
     
ITEM 1. LEGAL PROCEEDINGS 40
     
ITEM 1A. RISK FACTORS 40
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 40
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 40
     
ITEM 4. MINE SAFETY DISCLOSURES 40
     
ITEM 5. OTHER INFORMATION 40
     
ITEM 6. EXHIBITS 40

 

i

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  September 30,  December 31, 
  2021  2020 
  (Unaudited)    
ASSETS      
CURRENT ASSETS      
Cash and cash equivalents $8,383,906  $998,717 
Short term investment  -   3,295,070 
Accounts receivable, net  -   1,071,590 
Other receivables, net  104,503   555,433 
Other receivable - related party  504,456   230,134 
Inventories  13,473   1,047,274 
Prepayments  21,916,404   4,780,975 
Total current assets  30,922,742   11,979,193 
         
PLANT AND EQUIPMENT, NET  5,240,523   82,833 
         
RIGHT-OF-USE ASSETS  -   69,038 
         
OTHER ASSETS        
Goodwill  7,753,340   11,650,157 
Intangible assets, net  3,137,781   1,226,521 
Deferred tax assets  -   127,377 
Total other assets  10,891,121   13,004,055 
         
Total assets $47,054,386  $25,135,119 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
         
CURRENT LIABILITIES        
Short term loans - bank $-  $475,103 
Accounts payable  136,535   1,126,091 
Other payables and accrued liabilities  12,048   21,883 
Other payables - related parties  466,407   491,136 
Customer deposits  10,581,943   900,522 
Lease liabilities - current  -   101,292 
Taxes payable  302,061   72,639 
Total current liabilities  11,498,994   3,188,666 
         
OTHER LIABILITIES        
Lease liabilities - noncurrent  -   33,698 
Total other liabilities  -   33,698 
         
Total liabilities  11,498,994   3,222,364 
         
COMMITMENTS AND CONTINGENCIES        
         
SHAREHOLDERS’ EQUITY        
Preferred stock, $0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively  -   - 
Common stock, $0.0001 par value, 200,000,000 shares authorized, 46,077,110  and 29,176,026 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively  4,608   2,918 
Additional paid-in capital  83,034,373   20,022,427 

Stock subscriptions receivable

  

(16,442,110

)  

-

 
(Accumulated deficit) retained earnings  (31,241,058)  951,773 
Accumulated other comprehensive loss  199,579   935,637 
Total shareholders’ equity  35,555,392   21,912,755 
         
Total liabilities and shareholders’ equity $47,054,386  $25,135,119 

  

1

 

 

CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

   

  For the
Three Months Ended
September 30,
  For the
Nine Months Ended
September 30,
 
  2021  2020  2021  2020 
REVENUES            
Wuge digital door signs $2,665,702  $-  $9,541,992  $- 
Trading and others  -   (45,759)  -   723 
TOTAL REVENUES  2,665,702   (45,759)  9,541,992   723 
                 
COST OF REVENUES                
Wuge digital door signs  40,656   -   199,342   - 
Trading and others  -   4,711   -   12,323 
TOTAL COST OF REVENUES  40,656   4,711   199,342   12,323 
                 
GROSS PROFIT  2,625,046   (50,470)  9,342,650   (11,600)
                 
OPERATING EXPENSES (INCOME)                
Selling, general and administrative  5,852,606   570,999   32,748,873   752,314 
Provision for (recovery of) doubtful accounts  -   (738,449)  -   - 
TOTAL OPERATING EXPENSES (INCOME)  5,852,606   (167,450)  32,748,873   752,314 
                 
INCOME FROM OPERATIONS  (3,227,560)  116,980   (23,406,223)  (763,914)
                 
OTHER INCOME (EXPENSE)                
Interest income  15,744   (2,794)  35,106   5,935 
Interest expense  -   4,375   -   - 
Investment income  -   -   -   - 
Other income (expense), net  557,107   -   2,373,550   (1)
Total other income (expense), net  572,851   1,581   2,408,656   5,934 
                 
LOSS(INCOME) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS  (2,654,709)  118,561   (20,997,567)  (757,980)
                 
PROVISION FOR INCOME TAXES  -   -   -   - 
                 
LOSS(INCOME) FROM CONTINUING OPERATIONS  (2,654,709)  118,561   (20,997,567)  (757,980)
                 
Discontinued operations:                
Income (loss) from discontinued operations, net of taxes  -   (459,119)  23,571   424,774 
Gain on disposal, net of taxes  15,661   (151,318)  (11,218,835)  6,800,299 
                 
Net loss  (2,639,048)  (491,876)  (32,192,831)  6,467,093 
                 
OTHER COMPREHENSIVE INCOME                
Foreign currency translation adjustment  3,386   1,203,719   (736,058)  496,479 
                 
COMPREHENSIVE  LOSS(INCOME) $(2,635,662) $711,843  $(32,928,889) $6,963,572 
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES                
Basic and diluted*  37,608,252   28,787,800   37,608,252   28,208,444 
                 
Earnings per share from continuing operations                
Basic and diluted  (0.07)  (0.00)  (0.58)  (0.03)
                 
Earnings per share from discontinued operations                
Basic and diluted  0.00   (0.02)  (0.30)  0.26 
                 
Earnings per share available to common shareholders                
Basic and diluted* $(0.07) $(0.02) $(0.90) $0.23 

 

2

 

 

CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

  For the Nine Months Ended September 30, 2020 
        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, 2020  -  $-   20,821,661  $2,082  $8,350,861   -  $(1,558,683) $(832,267) $5,961,993 
Net income  -       -   -   -   -   6,467,093   -   6,467,093 
Issuance of common stock for acquisition  -   -   4,000,000   400   7,199,600   -   -   -   7,200,000 
Issuance of common stock for cash          5,367,297   537   6,203,979   -   -   -   6,204,516 
The cancellation of the common stock          (1,012,932)  (101)  (1,732,013)              (1,732,114)
Foreign currency translation  -   -   -   -   -   -   -   496,479   496,479 
BALANCE, September 30, 2020 (Unaudited)  -  $-   29,176,026  $2,918   20,022,427  $-  $4,908,410  $(335,788) $24,597,967 

 

  For the Nine Months Ended September 30, 2021 
       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, 2021          -           -   29,176,026   2,918   20,022,427   -           -   951,773   935,637   21,912,755 
Net loss  -   -   -   -   -   -   -   (32,192,831)  -   (32,192,831)
Issuance of common stock for Bonus  -   -   925,494   92   2,563,526   -               2,563,618 
Issuance of common stock for purchase Bitcoin mining machines  -   -   1,587,800   159   6,159,841   -               6,160,000 
Issuance of common stock for  purchase digital currency mining machines          7,647,493   765   16,441,346   -               16,442,111 
Issuance of shares for cash  -   -   4,166,666   417   22,539,579   -   -   -   -   22,539,996 
Issuance of common stock for employee compensation  -   -   3,000,000   300   16,923,550   -   -   -   -   16,923,850 
The cancellation of the common stock  -   -   (426,369)  (43)  (1,615,896)  -   -   -   -   (1,615,939)
Issuance of common stock                      (16,442,110)              (16,442,110)
Foreign currency translation  -   -   -   -   -   -   -   -   (736,058)  (736,058)
BALANCE, September 30, 2021 (Unaudited)  -  $-   46,077,110  $4,608  $83,034,373  $(16,442,110) $-  $(31,241,058) $199,579  $35,555,392 

  

3

 

 

CODE CHAIN NEW CONTINENT LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

  For the
Nine Months Ended
September 30,
 
  2021  2020 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income $(32,192,831) $6,467,093 
Adjustments to reconcile net income to net cash used in operating activities:        
Depreciation of plant and equipment  1,237,480   14,250 
Amortization of intangible assets  151   93 
Issuance of common stock for employee compensation  16,923,850     
Issuance of common stock for bonus  2,563,618     
Disposal of the company  11,218,835   (7,911,096)
Deferred tax provision      37,444 
Bitcoin revenue  (2,366,518)    
Change in operating assets and liabilities        
Notes receivable  -   42,902 
Accounts receivables  (419,509)  652,449 
Other receivables  439,725   (40,106)
Other receivable - related party  (273,570)  13,329 
Inventories  (599,768)  (193,695)
Prepayments  (21,217,981)  (687,356)
Accounts payable  (420,377)  668,000 
Other payables and accrued liabilities  145,934   313,319 
Customer deposits  10,094,951   1,155,086 
Lease liabilities  3,227   16,512 
Taxes payable  263,930   2,829 
Net cash provided by (used in) operating activities  (14,598,852)  551,053 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Net increase in cash from acquisition of Wuge      288,788 
Net decrease in cash from disposal of discontinued operations  (271,099)  (470,576)
Purchase of Intangible assets  463,679   (1,144,624)
Purchase of financial products  -   (3,074,679)
Purchase of equipment  (287,821)  (68,188)
Net cash used in investing activities  (95,241)  (4,469,279)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from issuance of common stock  22,539,996   2,511,657 
Proceeds from short-term loans - bank  255,023   443,326 
Repayments of other payable - related parties  -   - 
Net cash provided by financing activities  22,795,019   2,954,983 
         
EFFECT OF EXCHANGE RATE ON CASH  (25,129)  (56,922)
         
NET (DECREASE)/INCREASE IN CASH  8,075,796   (1,020,165)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD  308,110   2,483,567 
CASH AND CASH EQUIVALENTS, END OF PERIOD $8,383,906  $1,463,402 
         
SUPPLEMENTAL CASH FLOW INFORMATION:        
Cash paid for income tax $-  $19,468 
Cash paid for interest $7,708  $12,598 
         
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES        
Issuance of common stock for  Bonus $2,563,618  $- 
Issuance of common stock for purchase Bitcoin mining machines  6,160,000   - 
Issuance of common stock for  purchase digital currency mining machines  16,442,111     
Issuance of common stock for employee compensation  16,923,850   - 
The cancellation of the common stock  1,615,939   1,732,014 
Bitcoin revenue  2,366,518   - 
Initial recognition of right-of-use assets and lease liabilities $-  $251,598 

  

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 (the “Company” or “CCNC”), formerly known as TMSR Holding Company Limited and JM Global Holding Company, was a blank check company incorporated in Delaware on April 10, 2015. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets. On June 20, 2018, CCNC completed a reincorporation and as a result, the Company changed its state of incorporation from Delaware to Nevada (the “Reincorporation”). The Articles of Incorporation and Bylaws of CCNC Nevada became the governing instruments of the Company, resulting in a 2-for-1 forward stock split of the Company’s common stock (the “Forward Split). The Reincorporation and Forward Split were approved by shareholders holding the majority of the outstanding shares of common stock of CCNC Delaware on June 1, 2018 at the Annual Meeting of Shareholders.

 

On February 6, 2018, China Sunlong Environmental Technology Inc. (“China Sunlong”) consummated the business combination with the Company pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”) dated as of August 28, 2017 by and among (i) the Company; (ii) Zhong Hui Holding Limited; (iii) China Sunlong; (iv) each of the shareholders of China Sunlong named on Annex I of the Share Exchange Agreement (the “Sellers”); and (v) Chuanliu Ni, a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, in the capacity as the representative for the Sellers. Pursuant to the Share Exchange Agreement, the Company acquired from the Sellers all of the issued and outstanding equity interests of China Sunlong in exchange for 17,990,856 newly-issued shares of common stock of the Company to the Sellers. 1,799,088 of these newly-issued shares are held in escrow for 18 months from the closing date of the Business Combination as a security for China Sunlong and the Sellers’ indemnification obligations under the Share Exchange Agreement. This transaction is accounted for as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the shareholders of China Sunlong owns the majority of the outstanding shares of the Company immediately following the completion of the transaction and the Company’s operations was the operations of China Sunlong following the transaction. Accordingly, China Sunlong was deemed to be the accounting acquirer in the transaction and the transaction was treated as a recapitalization of China Sunlong. The financial statements of China Sunlong prior to February 6, 2018 are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented in the accompanying consolidated financial statements of the Company.

 

China Sunlong is a holding company incorporated on August 31, 2015, under the laws of the Cayman Islands. China Sunlong has no substantive operations other than holding all of the outstanding share capital of Shengrong Environmental Protection Holding Company Limited (“Shengrong BVI”). Shengrong BVI is a holding company incorporated on June 30, 2015, under the laws of the British Virgin Islands. Shengrong BVI has no substantive operations other than holding all of the outstanding share capital of Hong Kong Shengrong Environmental Technology Limited (“Shengrong HK”). Shengrong HK is also a holding company holding all of the outstanding equity of Shengrong Environmental Protection Technology (Wuhan) Co., Ltd. (“Shengrong WFOE”).

 

The Company focuses on the industrial solid waste recycling and comprehensive utilization. The Company’s main products are high efficiency permanent magnetic separators and comprehensive utilization systems for industrial solid wastes. The Company’s headquarter is located in Hubei Province, in the People’s Republic of China (the “PRC” or “China”). All of the Company’s business activities are carried out by the wholly owned operating Chinese company, Hubei Shengrong Environmental Protection Energy-Saving Science and Technology Ltd. (“Hubei Shengrong”) prior to May 1, 2018.

 

On April 11, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries (collectively “Purchasers”), entered into a Share Purchase Agreement with Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd. (collectively “Sellers”) and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a company incorporated in China engaging in the research, development, production and sale of coating materials. Pursuant to the Share Purchase Agreement, as supplemented on August 16, 2018, the Purchasers acquired all of the outstanding equity interests of Wuhan Host. In exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million, of which $4.7 million or RMB equivalent shall be paid in cash and $6.0 million shall be paid in shares of common stock, of CCNC (“Share Consideration”). The Parties agree the Share Consideration shall be an aggregate of 1,012,932 shares of common stock of which is based on the closing price of US$4.64 on March 27, 2018.

 

5

 

 

On March 31, 2017, China Sunlong completed its acquisition of 100% of the equity in TJComex International Group Corporation (“TJComex BVI”). At the closing of such acquisition, the selling shareholders of TJComex BVI received 5,935 shares of China Sunlong Common Stock valued at $926.71 per share for 100% of their equity in TJComex BVI. TJComex BVI owns 100% of the issued and outstanding capital stock of TJComex Hong Kong Company Limited (“TJComex HK”), a Hong Kong limited liability company, which owns 100% equity interest of Tianjin Corro Technological Consulting Co., Ltd. (“TJComex WFOE”), a wholly foreign owned enterprise incorporated under the laws of the PRC. Pursuant to certain contractual arrangements, TJComex WFOE controls Tianjin Commodity Exchange Co., Ltd. (“TJComex Tianjin”), a limited liability company incorporated under the law of the PRC. TJComex Tianjin is engaged in general merchandise trading business and related consulting services, and its headquarter is located in the city of Tianjin, PRC.

 

On April 2, 2018, the Company disposed of its subsidiary, TJComex BVI in consideration of (i) its minimum contribution to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI business and the rest of the Company’s business. The Company’s decision to dispose of TJComex BVI is to (i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity of the Company’s business, (iii) focus the Company’s resources on the solid waste recycling business as well as developing environmental control business opportunities; and (iv) make it possible for the Company to pursue acquisition opportunities for more compatible businesses. TJComex BVI was disposed to Chuanliu Ni, a Chinese citizen who is the director of China Sunlong.

 

As of April 2, 2018, the net assets of TJComex BVI were $16,598 and is being recorded as a loss from disposal of subsidiary in the consolidated financial statements for the period ending December 31, 2018. As TJComex BVI operating revenue was less than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for TJComex BVI were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

 

On October 10, 2017, Hubei Shengrong established a wholly owned subsidiary, Fujian Shengrong Environmental Protection Energy-Saving Science and Technology Ltd. (“Fujian Shengrong”), with registered capital of RMB 10,000,000 (approximately USD 1,518,120). Fujian Shengrong has no operations prior to May 30, 2018. On May 30, 2018, Hubei Shengrong and two unrelated entities entered into certain Capital Transfer and Contribution Agreement pursuant to which these two entities shall contribute cash of approximately USD 5.0 million (RMB 32.0 million) into Fujian Shengrong and Hubei Shengrong shall contribute approximately USD 1.3 million (RMB 8.0 million) which is the consideration for certain technology consulting services to be provided by Hubei Shengrong to the two entities. Upon completion of the contribution, the total registered capital of Fujian Shengrong increased to RMB 40.0 million (approximately USD 6.3 million) and Hubai Shengrong owns 20% and the two entities collectively own 80% of the equity interest of Fujian Shengrong. In August 2018, Hubei Shengrong transferred 20% equity interest of Fujian Shengrong to Shengrong WFOE. The Company will account for the investment in Fujian Shengrong using the cost method. Since Shengrong WFOE did not provide any cash contribution to Fujian Shengrong or technology services, the investment balance under the cost method investment on September 30, 2020 is $0.

 

On November 30, 2018, the Company entered into a Share Purchase Agreement with Jirong Huang and Qihuang Wang (collectively “Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the Share Purchase Agreement, CCNC shall issue an aggregate of 4,630,000 shares of CCNC’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”) with Shengrong WFOE, through which Shengrong WFOE shall have the right to control, manage and operate Rong Hai in return for a service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are designed to provide Shengrong WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in China. The Acquisition closed on November 30, 2018. Starting on November 30, 2018, the Company’s business activities added coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap, of which business activities are carried out in Nantong, Jiang Su Province, PRC.

 

6

 

 

On December 27, 2018, the Company, entered into an Equity Purchase Agreement with Hopeway International Enterprises Limited., a private limited company duly organized under the laws of British Virgin Islands (the “Hopeway”). Pursuant to the Equity Purchase Agreement, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to Hopeway in exchange for Hopeway’s agreement to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company, constituting all the shares owned by Hopeway. The transaction contemplated by the Equity Purchase Agreement is hereby referred as Disposition. The Company’s decision to dispose of Hubei Shengrong is due to the planning mandates of Wuhan Municipal Government 2018 which manufactures should move away from city’s downtown area. Therefore, due to the policy change, Hubei Shengrong is forced to close the existing facility, relocate and build a new facility, which is expected to take approximately 7-8 years. As a result, Hubei Shengrong will not be able to keep the production running and will generate no income in the foreseeable future. Management believed it is very difficult, if possible at all, to continue manufacturing of solid waste recycling systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while retaining the research and development and sale of solid waste recycling systems business. Upon closing of the Disposition, Hopeway will become the sole shareholder of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except the research and development team and intellectual property rights in connection with the solid waste recycling systems business shall be assigned to Shengrong WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the sale of solid waste recycling systems business and the processed industrial waste materials trading business, this restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations for Hubei Shengrong were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

 

In April 2019, TMSR Holdings Limited (“TMSR HK”), our indirect wholly owned subsidiary, was incorporated under the laws of Hong Kong.

 

In August 2019, Tongrong Technology (Jiangsu) Co., Ltd. (“Tongrong WFOE”), our indirect wholly owned subsidiary, was incorporated under the laws of PRC.

 

In August 2019, Citi Profit Investment Holding Limited (“Citi Profit”), an exempted company formed under the laws of the British Virgin Islands, became our wholly owned subsidiary.

 

TMSR HK, Tongrong WFOE and Citi Profit are all holding companies that do not have any substantive business operations.

 

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, including Wei Xu, Bibo Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network Technology Co., Ltd., which is also controlled by Wei Xu. Pursuant to the share purchase agreement, on January 24, 2020, the Company issued an aggregate of 4,000,000 shares of TMSR’s common stock to the shareholders of Wuge, in exchange for Wuge’s shareholders’ agreement to enter into, and their agreement to cause Wuge to enter into, certain VIE agreements (the “Wuge VIE Agreements”) with Tongrong WFOE, through which Tongrong WFOE has the right to control, manage and operate Wuge in return for a service fee equal to 100% of Wuge’s net income.

 

On April 30, 2020, Tongrong WFOE entered into a series of assignment agreements with Shengrong WFOE, Rong Hai and shareholders of Rong Hai, pursuant to which Shengrong WFOE assign all its rights and obligations under the Rong Hai VIE Agreements to Tongrong WFOE. The Rong Hai VIE Agreements and the Assignment Agreements grant Tongrong WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property and revenue of Rong Hai. The assignment does not have any impact on Company’s consolidated financial statements.

 

Effective May 18, 2020, the Company changed its corporate name from “TMSR Holding Company Limited” to “Code Chain New Continent Limited” pursuant to a Certificate of Amendment to the Company’s Articles of Incorporation filed with the Secretary of State of the State of Nevada. In connection with the name change, effective May 18, 2020, the ticker symbol of the Company’s common stock and warrants changed from “TMSR” and “TMSRW” to “CCNC” and “CCNCW”, respectively.

 

On June 30, 2020, the Company entered into a share purchase agreement with Jiazhen Li, former CEO of the Company (the “Buyer”), Long Liao and Chunyong Zheng, who are former shareholders of Wuhan HOST Coating Materials Co., Ltd., an indirect subsidiary of the Company, (collectively the “Payees”). Pursuant to the Agreement, the Company agreed to sell, and the Buyer agreed to purchase all the issued and outstanding ordinary shares of China Sunlong (the “Sunlong Shares”). The Payees have a prior relationship with the Buyer and have agreed to be responsible for the payment of the purchase price on behalf of Buyer. The purchase price for the Sunlong Shares shall be $1,732,114, payable in consideration of cancellation of 1,012,932 shares of the Company owned by the Payees (the “CCNC Shares”). The CCNC Shares are valued at $1.71 per share, based on the closing price of the Company’s common stock on June 30, 2020. The CCNC Shares were cancelled on August 31, 2020.

 

7

 

 

In December 2020, Makesi Iot Technology (Shanghai) Co., Ltd. (“Makesi WFOE”), our indirect wholly owned subsidiary, was incorporated under the laws of PRC.

 

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 $2,464,411, payable in the form of cancelling 426,369 shares of common stock of the Company owned by the Payee (the “CCNC Shares”). The CCNC Shares are valued at $5.78 per share, based on the average closing price of the Company’s common stock during the 30 trading days immediately prior to the date of the agreement from February 12, 2021 to March 26, 2021. On March 31, 2021, the Company closed the sale of the Tongrong Shares and caused the CCNC Shares to be cancelled. Tongrong WFOE contractually controls Rong Hai. The disposition of Tongrong WFOE included disposition of Rong Hai.

 

The accompanying consolidated financial statements reflect the activities of CCNC and each of the following entities:

 

Name Background Ownership
China Sunlong3 A Cayman Islands company 100% owned by the Company
      
Shengrong BVI3 A British Virgin Island company 100% owned by China Sunlong
  Incorporated on June 30, 2015  
      
Citi Profit BVI A British Virgin Island company  100% owned by the Company
  Incorporated on April 2019  
      
Shengrong HK3 A Hong Kong company 100% owned by Shengrong BVI
  Incorporated on September 25, 2015  
      
TMSR HK A Hong Kong company 100% owned by Citi Profit BVI
  Incorporated on April 2019  
      
Shengrong WFOE3 A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”) 100% owned by Shengrong HK
 Incorporated on March 1, 2016  
 Registered capital of USD 12,946 (HKD100,000), fully funded  
 Purchase and sales of high efficiency permanent magnetic separator and comprehensive utilization system  
  Trading of processed industrial waste materials  
      
Tongrong WFOE4 A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”) 100% owned by TMSR HK
  Incorporated on August 2019  
      
Makesi WFOE A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”) 100% owned by TMSR HK
  Incorporated on December 2020  

 

8

 

 

Name Background Ownership
Hubei Shengrong2 A PRC limited liability company 100% owned by Shengrong WFOE
  Incorporated on January 14, 2009  
  Registered capital of USD 4,417,800 (RMB 30,000,000), fully funded  
  Production and sales of high efficiency permanent magnetic separator and comprehensive utilization system.  
  Trading of processed industrial waste materials  
      
Wuhan HOST3 A PRC limited liability company 100% owned by Shengrong WFOE
  Incorporated on October 27, 2010  
  Registered capital of USD 750,075 (RMB 5,000,000), fully funded  
  Research, development, production and sale of coating materials.  
      
Shanghai Host Coating Materials Co., Ltd.3 A PRC limited liability company  
 Incorporated on December 11, 2014  
 Registered capital of USD 3,184,371 (RMB 20,000,000), to be fully funded by November 2024  
 No operations and no capital contribution has been made as of December 31, 2018 80% owned by Wuhan HOST
      
Wuhan HOST Coating Materials Xiaogan Co., Ltd.3 A PRC limited liability company 90% owned by Wuhan HOST
 Incorporated on December 25, 2018  
 Registered capital of USD 11,595,379 (RMB 80,000,000), to be fully funded by December 2028  
 No operations and no capital contribution has been made as of December 31, 2018  
      
Rong Hai4 A PRC limited liability company VIE of Tongrong WFOE
 Incorporated on May 20, 2009  
 Registered capital of USD 3,171,655 (RMB 20,180,000), fully funded  
  Coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap  
      
Wuge A PRC limited liability company VIE of Makesi WFOE
  Incorporated on July 4, 2019  
      
TJComex BVI1 A British Virgin Island company 100% owned by China Sunlong
  Incorporated on March 8, 2016  
      
TJComex HK1 A Hong Kong company 100% owned by TJComex BVI
  Incorporated on March 19, 2014  
      
TJComex WFOE1 A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”) 100% owned by TJComex HK
  Incorporated on March 10, 2004  
  Registered capital of USD 200,000  
      
TJComex Tianjin1 A PRC limited liability company 100% owned by TJComex WFOE
  Incorporated on November 19, 2007  
  Registered capital of USD 7,809,165 (RMB 55,000,000)  
  General merchandise trading business and related consulting services  

 

1Disposed on April 2, 2018
2Disposed on December 27, 2018
3Disposed on June 30, 2020
4Disposed on March 31, 2021

 

9

 

 

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

 

Pursuant to the consulting services agreement between Rong Hai and Shengrong WFOE dated November 30, 2018 and the agreement to assign consulting services agreement among Rong Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, Tongrong WFOE has the exclusive right to provide consulting services to Rong Hai relating to Rong Hai’s business, including but not limited to business consulting 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 Rong Hai’s actual operation on a quarterly basis.

 

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.

 

10

 

 

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.

 

On April 30, 2020, Tongrong WFOE entered into a series of assignment agreements with Shengrong WFOE, Rong Hai and shareholders of Rong Hai, pursuant to which Shengrong WFOE assign all its rights and obligations under the Rong Hai VIE Agreements to Tongrong WFOE. The Rong Hai VIE Agreements and the Assignment Agreements grant Tongrong WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property and revenue of Rong Hai. The assignment does not have any impact on Company’s consolidated financial statements.

 

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.

 

11

 

 

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 20 years and can be extended by Tongrong WFOE unilaterally by prior written notice to the other parties.

 

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.

 

As of the date of this report, 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.

 

12

 

 

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 $199,579 and $935,637 as of September 30, 2021 and December 31, 2020, respectively. The balance sheet amounts, with the exception of shareholders’ equity at September 30, 2021 and December 31, 2020 were translated at 6.49 RMB and 6.52 RMB to $1.00, respectively. The shareholders’ equity accounts were stated at their historical rate. The average translation rates applied to statement of income accounts for the nine months ended September 30, 2021 and 2020 were 6.47 RMB and 6.99 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

 

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 September 30, 2021 and December 31, 2020, no obsolescence and cost in excess of net realizable value were recognized.

  

13

 

 

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
Residual

Value

 
Building 5 - 20 years             5%
Office equipment and furnishing 5 years  5%
Production equipment 3 - 10 years  5%
Automobile 5 years  5%
Leasehold improvements Shorter of the remaining lease terms or estimated useful lives  0%

 

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 50 years
Patents 10 - 20 years
Software 5 years

 

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.

 

14

 

  

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 except for the retainage revenues where the retainage periods are recognized over the retainage period, usually is a period of twelve months.

 

15

 

  

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.

 

Revenue from equipment and systems, revenue from coating and fuel materials, and revenue from trading and others are recognized at the date of goods delivered and title passed to customers, when a formal arrangement exists, the price is fixed or determinable, the Company has no other significant obligations and collectability is reasonably assured. Such revenues are recognized at a point in time after all performance obligations are satisfied under the new five-step model. In addition, training service revenues are recognized when the services are rendered and the Company has no other obligations, and collectability is reasonably assured. These revenues are recognized at a point in time.

  

Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.

 

The Company’s disaggregate revenue streams are summarized as follows:

 

  

For the

Three Months Ended
September 30,

  

For the

Nine Months Ended
September 30,

 
  2021  2020  2021  2020 
Revenues – Wuge digital door signs $2,665,702  $-  $9,541,992  $- 
Trading and others      (45,759)  -   723 
Total revenues $2,665,702  $(45,759) $9,541,992  $723 

 

16

 

  

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 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company incurred no such penalties and interest for the nine months ended September 30, 2021 and 2020. As of September 30, 2021, the Company’s PRC tax returns filed for 2018, 2019 and 2020 remain subject to examination by any applicable tax authorities.

 

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. 9,079,348 and 10,500,000 of outstanding warrants which is equivalent to convertible of 4,539,674 and 5,250,000 common shares were excluded from the diluted earnings per share calculation due to its antidilutive effect for the nine months ended September 30, 2021 and 2020, respectively. 824,000 of outstanding options were excluded from the diluted earnings per share calculation due to its antidilutive effect for the 9 months ended September 30, 2021 and 2020.

 

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.

 

17

 

 

Note 3 – Business combination and restructuring

 

TJ Comex BVI

 

On April 2, 2018, the Company disposed of its subsidiary, TJComex BVI, in consideration of (i) its minimum contribution to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI business and the rest of the Company’s business. The Company’s decision to dispose TJComex BVI is to (i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity of the Company’s business, (iii) focus the Company’s resources on the solid waste recycling business as well as developing environmental control business opportunities; and (iv) make it possible for the Company to pursue acquisition opportunities for more compatible business. TJComex BVI was disposed to Chuanliu Ni, a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, for no consideration.

 

As of April 2, 2018, the net assets of TJComex BVI were $16,598 and will be recorded as a loss from disposal of subsidiary in the consolidated financial statements for the year ended December 31, 2018. As TJComex BVI operating revenue was less than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for TJComex BVI were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

  

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 4,000,000 shares of CCNC’s common stock to the Wuge Shareholders, in exchange for Wuge Shareholders’ agreement to enter into, and their agreement to cause Wuge to enter into, certain VIE agreements (“VIE Agreements”) with Tongrong WFOE the Company’s indirectly owned subsidiary, through which Tongrong WFOE shall have the right to control, manage and operate Wuge in return for a service fee equal to 100% of Wuge’s net income (the “Acquisition”). On January 3, 2020, Tongrong WFOE entered into a series of VIE Agreements with Wuge and the Wuge Shareholders. The VIE Agreements are designed to provide Tongrong 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. Wuge has all necessary license to carry out its business in China.Wuge is a technology company in development stage. It was incorporated in China in July 2019. Wuge Manor, the game Wuge is developing, is the world’s first game that combines Internet of Things (IoT) and e-commerce that is based on Code Chain platform. Through the game, players will be able to have access to hundreds of vendors and business owners in over 100 cities in China, participate in activities those businesses set up and collect points, which can be redeemed as equipment in the game or coupons usable when making purchase at that business. In addition, Wuge produced electronic tokens that can be stored in the Code Chain system to purchase virtual property based on real estate. The Acquisition closed on January 24, 2020.

 

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.

 

18

 

 

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 $7,200,000 

 

  Fair Value 
Cash $228,788 
Other current assets  20,834 
Plant and equipment  6,024 
Other noncurrent assets  8,097 
Goodwill  7,343,209 
Total asset  7,606,952 
Total liabilities  (406,952)
Net asset acquired $7,200,000 

 

Approximately $7.3 millions of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of the Company and Wuge. None of the goodwill is expected to be deductible for income tax purposes.

 

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 $2,464,411, payable in the form of cancelling 426,369 shares of common stock of the Company owned by the Payee (the “CCNC Shares”). The CCNC Shares are valued at $5.78 per share, based on the average closing price of the Company’s common stock during the 30 trading days immediately prior to the date of the agreement from February 12, 2021 to March 26, 2021. On March 31, 2021, the Company closed the sale of the Tongrong Shares and caused the CCNC Shares to be cancelled. Tongrong WFOE contractually controls Jaingsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a variable interest entity of the Company. The disposition of Tongrong WFOE included disposition of Rong Hai.

 

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.

 

19

 

 

Accordingly, the accounts of Rong Hai and Wuge are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s consolidated financial statements beginning on November 30, 2018.

 

The carrying amount of the VIE’s assets and liabilities are as follows:

 

  September 30,  December 31, 
  2021  2020 
Current assets $9,930,745  $9,600,157 
Property, plants and equipment, Intangible Assets  1,049,564   1,268,272 
Other noncurrent assets  -   196,415 
Goodwill  7,753,340   11,650,157 
Total assets  18,733,649   22,715,001 
         
Current liabilities  12,562,464   8,766,619 
Non-current liabilities  -   33,698 
Total liabilities  12,562,464   8,800,317 
Net assets $6,171,185  $13,914,684 

 

  September 30,  December 31, 
  2021  2020 
Short-term loan $-  $475,103 
Accounts payable  -   1,037,723 
Other payables and accrued liabilities  145,235   103,323 
Other payables – related party  1,533,225   6,090,841 
Tax payables  302,061   57,815 
Customer Advances  10,581,943   900,522 
Lease liabilities  -   101,292 
Total current liabilities  12,562,464   8,766,619 
Lease liabilities - noncurrent  -   33,698 
Total liabilities $12,562,464  $8,800,317 

 

The summarized operating results of the VIE’s are as follows:

 

  For the
nine months ended
September 30,
2021
 
Operating revenues $9,541,992 
Gross profit  9,384,552 
Loss from operations  (1,368,074)
Net loss $(1,368,074)

 

20

 

 

Note 5 – Accounts receivable, net

 

Accounts receivable consist of the following:

 

  September 30,
2021
  December 31,
2020
 
Accounts receivable $                -  $1,670,526 
Less: Allowance for doubtful accounts  -   (598,936)
Total accounts receivable, net $-  $1,071,590 

 

Movement of allowance for doubtful accounts is as follows:

 

  September 30,
2021
  December 31,
2020
 
Beginning balance $                -  $- 
Beginning balance from Wuhan HOST  -   - 
Beginning balance from Rong Hai  -   24,055 
Addition  -   542,087 
Recovery  -   - 
Exchange rate effect  -   32,794 
Ending balance $-  $598,936 

 

Note 6 – Inventories

 

Inventories consist of the following:

 

  September 30,
2021
  December 31,
2020
 
Raw materialsc $-  $- 
Work in progress  -   - 
Finished Goods  13,473   1,047,274 
Total inventories $13,473  $1,047,274 

 

Note 7 – Plant and equipment, net

 

Plant and equipment consist of the following:

 

  September 30,
2021
  December 31,
2020
 
Office equipment and furniture $6,262,187  $76,605 
Automobile  216,175   272,902 
Subtotal  6,478,362   349,507 
Less: accumulated depreciation  (1,237,839)  (266,674)
Total $5,240,523  $82,833 

 

Depreciation expense for the nine months ended September 30, 2021 and 2020 amounted to $1,237,839 and $14,250, respectively.

 

21

 

 

Note 8 – Intangible assets, net

 

Intangible assets consist of the following:

 

  September 30,
2021
  December 31,
2020
 
Development of technology $770,962  $1,226,072 
Bitcoin  2,366,518     
Software  601   598 
Less: accumulated amortization  (301)  (149)
Net intangible assets $3,137,780  $1,226,521 

 

Amortization expense for the nine months ended September 30, 2021 and 2020 amounted to $301 and $112, respectively.

 

As part of a make good provision in prior capital transaction entered into by the Company regarding the acquisition of certain crypto-mining machines, the Company received 54 crypto coin wallets holding Bitcoin with a total aggregate value of approximately $1.81 million. The Company has accounted for these coins as indefinite life intangible assets. The Company recorded the receipt of such coins as other income in its result of operations for the nine months ended September 30, 2020.

 

Note 9 – Goodwill

 

The changes in the carrying amount of goodwill by business units are as follows:

 

  Rong Hai  Wuge  Total 
Balance as of December 31, 2020 $3,896,817  $7,753,340  $11,650,157 
Disposal of the company  (3,896,817)  -   (3,896,817)
Balance as of  September 30, 2021 $-  $7,753,340  $7,753,340 

 

Note 10 – Related party balances and transactions

 

Related party balances

 

 a.Other receivable – related party:

 

Name of related party Relationship September 30,
2021
  December 31,
2020
 
Chengdu Yuan Code Chain Technology Co. Ltd A company controlled by former shareholder of the Company $504,456  $230,134 
           

 

The Company advanced funds to the related party for technical services.

 

 b.Other payables – related parties:

 

Name of related party Relationship September 30,
2021
  December 31,
2020
 
Chuanliu Ni Chief Executive Officer and director of a former subsidiary $325,907  $325,907 
Zhong Hui Holding Limited Shareholder of the Company  140,500   140,500 
Qihai Wang Shareholder of the Company  -   24,729 
Total   $466,407  $491,136 

 

The above payables represent interest free loans and advances. These loans and advances are unsecured and due on demand.

 

22

 

 

Note 11 – 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 $26.5 million. As of September 30, 2021, CCNC’s net operating loss carry forward for United States income taxes was approximately $5.6 million. The net operating loss carry forwards are available to reduce future years’ taxable income through year 2038. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management reviews this valuation allowance periodically and makes changes accordingly.

 

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 16.5% in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law, TMSR HK is exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

 

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 25% after appropriate tax adjustments.

 

23

 

 

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:

 

  September 30,
2021
  December 31,
2020
 
Net operating losses carried forward – U.S. $5,463,533  $303,560 
Net operating losses carried forward – PRC  -   - 
Bad debt allowance  -   127,377 
Valuation allowance  (5,463,533)  (303,560)
Deferred tax assets, net $-  $127,377 

 

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 6% to 17% of the gross sales price and changed to 6% to 16% of gross sales starting in May 2018. The VAT standard rates changed to 6% to 13% of the gross sales prices starting in April 2019. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished products and services.

 

Taxes payable consisted of the following:

 

  September 30,
2021
  December 31,
2020
 
VAT taxes payable $302,061  $1,589 
Income taxes payable  -   70,914 
Other taxes payable  -   136 
Total $302,061  $72,639 

 

24

 

 

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 September 30, 2021 and December 31, 2020, $7,220,994 and $998,717 and were deposited with various financial institutions located in the PRC, respectively. As of September 30, 2021 and December 31, 2020, $1,162,912 and $0 were deposited with one financial institution located in the U.S., respectively. While management believes 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. 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.

 

Makesi WFOE and Wuge are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, Makesi WFOE may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. Wuge may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by State Administration of Foreign Exchange.

 

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 September 30, 2021 and December 31, 2020, amounts restricted are the net assets of Makesi WFOE and Wuge which amounted to $(1,013,341) and $(216,935), respectively.

 

Stock split

 

On June 1, 2018, the Company’s shareholder approved a 2 for 1 stock split of the Company’s common stock at the Annual Meeting of Shareholders. The stock split was effected on June 20, 2018, pursuant to the completion of the reincorporation from Delaware to Nevada. All shares and per share amounts used herein and in the accompanying consolidated financial statements have been retroactively restated to reflect the stock split.

  

Common stock

 

On June 23, 2018, the Company issued an aggregate of 26,693 shares of the Company’s common stock, par value $0.0001 per share, to certain non-U.S. purchasers at a purchase price of $5.00 per share for an aggregate offering price of $133,335 pursuant to certain securities purchase agreement dated April 20, 2018 and June 22, 2018. The issuances were pursuant to the exemption from registration under Regulation S promulgated under the Securities Act of 1933, as amended.

 

On February 12, 2019, the Company’s warrant holders converted 294,971 of the Company’s warrants into 52,077 shares of the Company’s common stock using cashless exercises method.

 

25

 

 

On February 20, 2019, the Company’s warrant holders converted 415,355 of the Company’s warrants into 54,826 shares of the Company’s common stock using cashless exercises method.

 

On March 11, 2019, the Board granted an aggregate of 131,330 shares of restricted common stock, with a fair value of $261,347, determined using the closing price of $1.99 on March 11, 2019, to repay the debt the Company owed to two unrelated third parties. As the carrying value of the debt equaled to the fair value of the 131,330 common shares at $1.99 per share, no gain or loss were recognized upon this debt settlement.

 

On March 15, 2019, the Board granted an aggregate of 142,530 shares of restricted common stock, with a fair value of $290,761, determined using the closing price of $2.04 on March 15, 2019, to repay the debt the Company owed to one unrelated third party. As the carrying value of the debt equaled to the fair value of the 142,530 common shares at $2.04 per share, no gain or loss were recognized upon this debt settlement.

 

On April 4, 2019, the Company entered into certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as amended pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per share, at a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million.

 

On November 20, 2019, the company wrote off 947,037 common shares.

 

On December 23, 2019, the Company entered into certain securities purchase agreement (the “SPA”) with certain “non-U.S. Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the Company agreed to sell 3,692,859 shares of its common stock (“Common Stock”), par value $0.0001 per share, at a per share purchase price of $1.00. The net proceeds to the Company from this offering will be approximately $3.66 million.

 

On January 3, 2020, the Company entered into a Share Purchase Agreement with Wuge and all the shareholders of Wuge (“Wuge Shareholders”). Wuge Shareholders are Wei Xu, Bibo Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network Technology Co., Ltd., which is controlled by Wei Xu. Pursuant to the SPA, TMSR shall issue an aggregate of 4,000,000 shares of TMSR’s common stock to the Wuge Shareholders, in exchange for Wuge Shareholders’ agreement to enter into, and their agreement to cause Wuge to enter into, certain VIE agreements (“VIE Agreements”) with Tongrong Technology (Jiangsu) Co., Ltd. (“WFOE”), the Company’s indirectly owned subsidiary, through which WFOE shall have the right to control, manage and operate Wuge in return for a service fee equal to 100% of Wuge’s net income (“Acquisition”). On January 24, 2020, the Company completed the Acquisition and issued the Shares to the Wuge Shareholders.

 

On June 30, 2020, the Company entered into a share purchase agreement (the “Agreement”) with Jiazhen Li, former CEO of the Company (the “Buyer”), Long Liao and Chunyong Zheng, who are former shareholders of Wuhan HOST Coating Materials Co., Ltd., an indirect subsidiary of the Company, (collectively the “Payees”). Pursuant to the Agreement, the Company agreed to sell and the Buyer agreed to purchase all the issued and outstanding ordinary shares of China Sunlong Environmental Technology Inc., a Cayman Islands company and a subsidiary of the Company (the “Sunlong Shares”). The Payees have a prior relationship with the Buyer and have agreed to be responsible for the payment of the purchase price on behalf of Buyer. The purchase price for the Sunlong Shares shall be $1,732,114, payable in consideration of cancellation of 1,012,932 shares of the Company owned by the Payees (the “CCNC Shares”). The CCNC Shares are valued at $1.71 per share, based on the closing price of the Company’s common stock on June 30, 2020.

 

On August 11, 2020, pursuant to certain securities purchase agreements dated May 1, 2020, the Company issued 1,674,428 shares of its common, at a per share purchase price of $1.50, to the eleven investors. The gross proceeds to the Company from this private placement were approximately $2.51 million.

 

26

 

 

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 the sale of (i) 4,166,666 shares of common stock, par value $0.0001 of the Company (the “Shares”) and (ii) registered investor warrants, with a term of five years, exercisable immediately upon issuance, to purchase an aggregate of up to 1,639,362 shares of common stock (the “Registered Investor Warrant Shares”) at an exercise price of $6.72 per share, subject to adjustments thereunder, including a reduction in the exercise price, in the event of a subsequent offering at a price less than the then current exercise price, to the same price as the price in such offering (a “Price Protection Adjustment”) (the “Registered Investor Warrants”), and (b) a concurrent private placement (the “Private Placement” and collectively with the Registered Direct Offering, the “Offering”) for the sale of unregistered investor warrants, with a term of five and one-half years, first exercisable on the date that is the earlier of (i) six months after the date of issuance or (ii) the date on which the Company obtains stockholder approval approving the sale of all of the securities offered and sold under the Purchase Agreement (the “Stockholder Approval”) to purchase an aggregate of up to 2,527,304 shares of common stock (the “Unregistered Investor Warrant Shares”) at an exercise price of $6.72 per share, subject to adjustments thereunder, including (x) a Price Protection Adjustment and (y) in the event the exercise price is more than $6.10, a reduction of the exercise price to $6.10, upon obtaining the Stockholder Approval (the “Unregistered Investor Warrants”). The Shares, the Registered Investor Warrants, the Unregistered Investor Warrants, the Registered Investor Warrant Shares and the Unregistered Investor Warrant Shares are collectively referred to as the “Securities.” The Company received gross proceeds from the sale of the Securities of $24,999,996, before deducting placement agent fees and other Offering expenses. The Company intends to use the net proceeds from this Offering for working capital and general business purposes.

 

On February 23, 2021, the Company entered into an asset purchase agreement with Sichuan RiZhanYun Jisuan Co., Ltd. (the “Seller”), which was amended and restated on April 16, 2021, and further amended on May 28, 2021. Pursuant to the asset purchase agreement, the Company purchased a total of 10,000 Bitcoin mining machines (the “Assets”) for a total purchase price of RMB 40,000,000 or US$6,160,000 based on the exchange rate as of April 8, 2021 (the “Purchase Price”), payable in the form of 1,587,800 shares of common stock of the Company, valued at US$3.88 per share, which is the closing bid price of the common stock of the Company on the Nasdaq Stock Market on April 8, 2021. The Seller shall cause revenue and any other source of income from the operation of the Assets to be paid to the Company, payable in cryptocurrency to be deposited into a cryptocurrency wallet held by the Company on a daily basis. The Company shall issue to the Seller or its designees RMB 5,000,000 or US$770,000 worth of common stock of the Company (the “Bonus Shares”) if the Assets generate an average net profit per day/10,000 machines (the “Daily Profit”) on behalf of the Company during the one-year period from March 19, 2021 to March 19, 2022 (the “Valuation Period”) equals to RMB 200,000 or US$30,800 and if the Assets generate an average net profit per month/10,000 machines (the “Monthly Profit”) on behalf of the Company during the Valuation Period equals to RMB 6,000,000 or US$924,000. If the Daily Profit is more than RMB 200,000 or US$30,800 and the Monthly Profit is more than RMB 6,000,000 or US$924,000, the Company shall issue to the Seller or its designees additional shares of common stock in proportion to the amount that is in excess. If the Daily Profit is less than RMB 200,000 or US$30,800 or the Monthly Profit is less than RMB 6,000,000 or US$924,000, the Company shall not issue to the Seller or its designees any Bonus Shares and such month is deemed a “Re-evaluated Month”. At the end of the Valuation Period, the Monthly Profit of such Re-evaluated Month(s) shall be aggregated (the “Aggregate Profit”), and the Company shall issue RMB5,000,000 or US$770,000 worth of common stock of the Company for every RMB6,000,000 or US$924,000 in Aggregate Profit on a pro rata basis. Such Daily Profit and Monthly Profit shall be determined on a monthly basis on the first day of the next month. Such Bonus Shares and additional shares, when applicable, shall be issued on the fifteenth day of the next month.  For any month that has 28 days or 31 days, the Monthly Profit is calculated based on the actual number of days in the month. Notwithstanding the foregoing, no share pursuant to this Agreement shall be issued earlier than May 24, 2021 in any event. The total number of shares of common stock, including the Bonus Shares, issuable to the Seller or its designees pursuant to the Agreement shall in no event be more than 19.99% of the total shares issued and outstanding of Company as of the February 23, 2021, the date of the asset purchase agreement.

 

On June 1, 2021, the Company issued to a designee of the Seller 2,513,294 shares of common stock, consisted of (i) the Purchase Price in the form of 1,587,800 shares of common stock and (ii) 925,494 Bonus Shares, valued at US$2.51 per share, which is the closing bid price of the common stock of the Company on the Nasdaq Stock Market on May 12, 2021, for meeting and exceeding the Daily Profit and Monthly Profit benchmark.

 

On July 28, 2021, the Company entered into an asset purchase agreement with certain seller(the “Seller”) pursuant to which the Company agreed to purchase from the Seller digital currency mining machines for a total purchase price of RMB 106,388,672.43, or US$ 16,442,109.95 (based on the exchange rate between RMB and USD of 1: 6.4705 as of July 8, 2021), payable in the form of 7,647,493 shares of common stock of the Company(“CCNC Shares”). The CCNC Shares are valued at $2.15 per share. The Company plans to use the assets to further develop its digital currency mining operation.

 

Warrants and options

 

On July 29, 2015, the Company sold 10,000,000 units at a purchase price of $5.00 per unit (“Public Units”) in its initial public offering. Each Public Unit consists of one share of the Company’s common stock, $0.0001 par value, and one warrant. Each warrant will entitle the holder to purchase one-half of one share of common stock at an exercise price of $2.88 per half share ($5.75 per whole share). Warrants may be exercised only for a whole number of shares of common stock. No fractional shares will be issued upon exercise of the warrants. The warrants will become exercisable on 30 days after the consummation of its initial Business Combination with China Sunlong on February 6, 2018. The warrants will expire February 5, 2023. The warrants will be redeemable by the Company at a price of $0.01 per warrant upon 30 days prior written notice after the warrants become exercisable, only in the event that the last sale price of the common stock equals or exceeds $12.00 per share for any 20 trading days within a 30-trading day period ending on the third business day prior to the date on which notice of redemption is given.

 

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The sponsor of the Company purchased, simultaneously with the closing of the Public Offering on July 29, 2015, 500,000 units at $5.00 per unit in a private placement for an aggregate price of $2,500,000. Each unit purchased is substantially identical to the units sold in the Public Offering.

 

The Company sold to the underwriter (and/or its designees), for $100, as additional compensation, an option to purchase up to a total of 800,000 units exercisable at $5.00 per unit (or an aggregate exercise price of $4,000,000) upon the closing of the Public Offering. Since the option is not exercisable until the earliest on the closing the initial Business Combination, the option will effectively represent the right to purchase up to 800,000 shares of common stock and 800,000 warrants to purchase 400,000 shares at $5.75 per full share for an aggregate maximum amount of $6,300,000. The units issuable upon exercise of this option are identical to those issued in the Public Offering.

 

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 12,000 shares of common stock at a price of $4.90 per share vested immediately and exercisable commencing six months after closing of the initial Business Combination and expiring five years from the closing of the initial Business Combination.

 

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, 2020  9,079,348   4,539,674  $5.75   2.13 
Granted/Acquired  -   -  $-   - 
Forfeited  -   -  $-   - 
Exercised  -   -   -   - 
September 30, 2021  9,079,348   4,539,674  $5.75   1.37 

 

The summary of option activity is as follows:

 

     Weighted  Average 
     Average  Remaining 
  Options  Exercise  Contractual 
  Outstanding  Price  Life 
December 31, 2020  824,000  $5.00   2.13 
Granted/Acquired  -  $-   - 
Forfeited  -  $-   - 
Exercised  -  $-   - 
September 30, 2021  824,000  $5.00   1.37 

 

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. 

 

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 has disposed of Tongrong WFOE and Rong Hai. 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.

 

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The following represents assets by division as of:

 

Total assets as of September 30,
2021
  December 31,
2020
 
Rong Hai and Tongrong WFOE $-  $15,006,063 
Wuge  18,425,264   2,304,566 
CCNC, Citi Profit BVI and TMSR HK  28,629,122   7,824,490 
Total Assets $47,054,386  $25,135,119 

 

Total revenues of September 30,
2021
  September 30,
2020
 
Rong Hai and Tongrong WFOE $-  $- 
Wuge  9,541,992   723 
CCNC, Citi Profit BVI and TMSR HK  -   - 
Total revenues $9,541,992  $723 

 

Note 16 – Discontinued Operations

 

The following depicts the financial position for the discounted operations of Wuhan Host, Shengrong WOFE, Tongrong WOFE and Rong Hai as of September 30, 2021 and December 31, 2020, and the result of operations for the discounted operations of Wuhan Host, Shengrong WOFE, Tongrong WOFE and Rong Hai for the nine months ended September 30, 2021 and 2020. The results of operations for Shengrong HK and China Sunlong have been included in the results of discontinued operations up to June 30, 2020, which is the date when they were disposed and removed from balance sheet.

 

Results of Operations For the
nine months ended
September 30,
2021
  For the
nine months ended
September 30,
2020
 
REVENUES      
Fuel materials $4,890,734  $8,956,705 
TOTAL REVENUES  4,890,734   8,956,705 
         
COST OF REVENUES        
Fuel materials  4,690,388   8,546,438 
TOTAL COST OF REVENUES  4,690,388   8,546,438 
         
GROSS PROFIT  200,346   410,267 
         
OPERATING EXPENSES (INCOME)        
Selling, general and administrative  160,254   96,245 
Provision for (recovery of) doubtful accounts  -   (149,775)
TOTAL OPERATING EXPENSES  160,254   (53,530)
         
INCOME FROM OPERATIONS  40,092   463,797 
         
OTHER INCOME (EXPENSE)        
Interest income  75   1,632 
Interest expense  (7,708)  (12,598)
Investment income  -   14,102 
Other income (expense), net  8   - 
Total other income (expense), net  (7,625)  3,136 
         
INCOME BEFORE INCOME TAXES  32,467   466,933 
         
PROVISION FOR INCOME TAXES  8,896   42,159 
         
NET INCOME $23,571  $424,774 

 

Note 17 – Subsequent events

 

On October 1, 2021, Mr. Weidong (David) Feng tendered his resignation as Co-Chief Executive Officer of the Company, effective October 6, 2021. Mr. Feng’s resignation was not a result of any disagreement with the Company’s operations, policies or procedures.

 

On October 1, 2021, Mr. Zijing (Ryan) Xu tendered his resignation as Chief Strategy Officer of the Company, effective October 6, 2021. Mr. Xu’s resignation was not a result of any disagreement with the Company’s operations, policies or procedures.

 

On October 7, 2021, approved by the Board of Directors and the Nominating and Corporate Governance Committee, Mr. Tingjun Yang, the Chief Executive Officer of the Company, was appointed as a director of the Company, effective October 7, 2021, until the Company’s next annual meeting of shareholders and until his successor is duly elected and qualified, or until his earlier death, resignation or removal. 

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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 (formerly known as TMSR Holding Company Limited and JM Global Holding Company, the “Company” or “CCNC”), through its subsidiaries and controlled entities, focused its business on the research, development and application of Internet of Things (IoT) and electronic tokens through Wuge Network Games Co., Ltd. (“Wuge”), an entity contractually controlled by the Company. 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”), an entity contractually controlled by 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 contractually controls 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.

 

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Recent Development

 

Asset Purchase Agreement dated February 23, 2021, as amended on April 16, 2021 and May 28, 2021

 

On February 23, 2021, the Company entered into an asset purchase agreement with Sichuan RiZhanYun Jisuan Co., Ltd. (the “Seller”), which was amended and restated on April 16, 2021, and further amended on May 28, 2021. Pursuant to the asset purchase agreement, the Company purchased a total of 10,000 Bitcoin mining machines (the “Assets”) for a total purchase price of RMB 40,000,000 or US$6,160,000 based on the exchange rate as of April 8, 2021 (the “Purchase Price”), payable in the form of 1,587,800 shares of common stock of the Company, valued at US$3.88 per share, which is the closing bid price of the common stock of the Company on the Nasdaq Stock Market on April 8, 2021. The Seller shall cause revenue and any other source of income from the operation of the Assets to be paid to the Company, payable in cryptocurrency to be deposited into a cryptocurrency wallet held by the Company on a daily basis. The Company shall issue to the Seller or its designees RMB 5,000,000 or US$770,000 worth of common stock of the Company (the “Bonus Shares”) if the Assets generate an average net profit per day/10,000 machines (the “Daily Profit”) on behalf of the Company during the one-year period from March 19, 2021 to March 19, 2022 (the “Valuation Period”) equals to RMB 200,000 or US$30,800 and if the Assets generate an average net profit per month/10,000 machines (the “Monthly Profit”) on behalf of the Company during the Valuation Period equals to RMB 6,000,000 or US$924,000. If the Daily Profit is more than RMB 200,000 or US$30,800 and the Monthly Profit is more than RMB 6,000,000 or US$924,000, the Company shall issue to the Seller or its designees additional shares of common stock in proportion to the amount that is in excess. If the Daily Profit is less than RMB 200,000 or US$30,800 or the Monthly Profit is less than RMB 6,000,000 or US$924,000, the Company shall not issue to the Seller or its designees any Bonus Shares and such month is deemed a “Re-evaluated Month”. At the end of the Valuation Period, the Monthly Profit of such Re-evaluated Month(s) shall be aggregated (the “Aggregate Profit”), and the Company shall issue RMB5,000,000 or US$770,000 worth of common stock of the Company for every RMB6,000,000 or US$924,000 in Aggregate Profit on a pro rata basis. Such Daily Profit and Monthly Profit shall be determined on a monthly basis on the first day of the next month. Such Bonus Shares and additional shares, when applicable, shall be issued on the fifteenth day of the next month.  For any month that has 28 days or 31 days, the Monthly Profit is calculated based on the actual number of days in the month. Notwithstanding the foregoing, no share pursuant to this Agreement shall be issued earlier than May 24, 2021 in any event. The total number of shares of common stock, including the Bonus Shares, issuable to the Seller or its designees pursuant to the Agreement shall in no event be more than 19.99% of the total shares issued and outstanding of Company as of the February 23, 2021, the date of the asset purchase agreement.

 

On June 1, 2021, the Company issued to a designee of the Seller 2,513,294 shares of common stock, consisted of (i) the Purchase Price in the form of 1,587,800 shares of common stock and (ii) 925,494 Bonus Shares, valued at US$2.51 per share, which is the closing bid price of the common stock of the Company on the Nasdaq Stock Market on May 12, 2021, for meeting and exceeding the Daily Profit and Monthly Profit benchmark.

 

Joint Venture Agreement dated June 1, 2021

 

On June 1, 2021, the Company entered into a joint venture agreement with Zhongyou Technology (Shenzhen) Co., Ltd. to jointly establish Zero Carbon Energy (Shenzhen) Co., Ltd. (the “Joint Venture”), a digital energy carbon neutral innovation platform which uses digital technology to open up the upstream and downstream of the energy industry chain to achieve carbon neutrality and boost the transformation and upgrading of the industry and carbon emission reduction. The registered capital of the Joint Venture shall be one million U.S. dollars, to be contributed by the Company. The Company will hold 51% interest of the Joint Venture.

 

Asset Purchase Agreement dated July 28, 2021

 

On July 28, 2021, the Company entered into an asset purchase agreement with certain seller pursuant to which the Company purchased from the seller digital currency mining machines for a total purchase price of RMB 106,388,672.43, or US$ 16,442,109.95 (based on the exchange rate between RMB and USD of 1: 6.4705 as of July 8, 2021). In exchange, the Company issued 7,647,493 shares of common stock of the Company, valued at $2.15 per share. The Company plans to use the assets to develop its digital currency mining operation.

 

Asset Purchase Agreement dated September 27, 2021

 

On September 27, 2021, the Company entered into an asset purchase agreement with Shenzhen Jindeniu Electronics Limited, pursuant to which the Company agreed to purchase certain storage servers (the “Assets”) for cloud computing, for a total purchase price of US$15,922,303. The Company plans to use the assets to develop its digital currency mining operation.

 

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 our 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 our 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 China and U.S. have 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 our 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. We lost employees, suppliers and customers and were not been able to recover. As a result, we sold our businesses 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. We have seen a slowdown in revenue growth in fiscal year 2020 and the three quarters of 2021.

 

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 and in the U.S. 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 September 30, 2021 vs. September 30, 2020

 

           Percentage 
  2021  2020  Change  Change 
Revenues –Wuge digital door signs $2,665,702   -  $2,665,702   N/A 
Revenues –Trading and others      (45,759)  45,759   (100.0)%
Total revenues  2,665,702   (45,759)  2,711,461   N/A 
                 
Cost of Revenues –Wuge digital door signs  40,656   -   40,656   N/A 
Cost of Revenues –Trading and others      4,711   (4,711)  (100.0)%
Total cost of revenues  40,656   4,711   35,945   763.0%
                 
Gross profit  2,625,046   (50,470)  2,675,516   N/A 
Operating expenses  5,852,606   (167,450)  6,020,056   N/A 
Loss(income) from operations  (3,227,560)  116,980   (3,334,540)  N/A 
Other income, net  572,851   1,581   571,270   36133.5%
Loss (income) from continuing operations  (2,654,709)  118,561   (2,773,270)  N/A 
Discontinued operations:                
Loss from discontinued operations  -   (459,119)  459,119   (100.0)%
Gain (loss) on disposal, net of taxes  15,661   (151,318)  166,979   (110.3)%
Loss income  (2,639,048)  (491,876)  (2,147,172)  436.5%

 

Revenues

 

The Company’s revenue consists of Wuge digital door signs. Total revenues increased by approximately $2.6 million, to approximately $2.6 million for the three months ended September 30, 2021, compared to approximately $(45,759) for the three months ended September 30, 2020. 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 $35,945, to approximately $40,656 for the three months ended September 30, 2021, compared to approximately $4,711 for the same period in 2020. 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 increased by approximately $2.6 million, to approximately $2.6 million during the three months ended September 30, 2021, from approximately $(50,470) for the three months ended September 30, 2020. The increase 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 increased by approximately $6 million from approximately ($0.16) million for the three months ended September 30, 2020 to approximately $5.8 million for the three months ended September 30, 2021. The increase was mainly due to the increased the listing fee of Wuge digital door signs.

 

Loss from Operations

 

As a result of the foregoing, loss from operations for the three months ended September 30, 2021 was approximately $3.1 million, an increase of approximately $3.2 million, or approximately 2762.1%, from approximately $0.1 million for the three months ended September 30, 2020. The increase was mainly due to increased bonus and the listing fee of Wuge digital door signs.

 

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Net Loss (Income)

 

The Company’s net loss decreased by approximately $2.0 million, or 413.5%, to approximately $2.6 million net loss for the three months ended September 30, 2021, from approximately $0.5 million net loss for the same period in 2020. The decrease was mainly due to increased bonus and the listing fee of Wuge digital door signs.

 

Nine Months Ended September 30, 2021 vs. September 30, 2020

 

           Percentage 
  2021  2020  Change  Change 
Revenues –Wuge digital door signs $9,541,992   -  $9,541,992   N/A 
Revenues –Trading and others      723   (723)  (100.0)%
Total revenues  9,541,992   723   

9,541,269

   1319677.6%
                 
Cost of Revenues –Wuge digital door signs  199,342   -   199,342   N/A 
Cost of Revenues –Trading and others      12,323   (12,323)  (100.0)%
Total cost of revenues  199,342   12,323   187,019   1517.6%
                 
Gross profit  9,342,650   (11,600)  9,354,250   N/A 
Operating expenses  32,748,873   752,314   31,996,559   4253.1%
Loss from operations  (23,406,223)  (763,914)  (22,642,309)  2964.0%
Other income, net  2,408,656   5,934   2,402,722   40490.8%
Loss from continuing operations  (20,997,567)  (757,980)  (20,239,587)  2670.2%
Discontinued operations:                
Income  from discontinued operations  23,571   424,774   (401,203)  94.5%
Loss (gain) on disposal, net of taxes  (11,218,835)  6,800,299   (18,019,134)  (265.0)%
Net (loss) income  (32,192,831)  6,467,093   (38,659,924)  N/A 

 

Revenues 

 

The Company’s revenue consists of Wuge digital door signs. Total revenues increased by approximately $9.5 million, to approximately $9.5 million for the nine months ended September 30, 2021, compared to approximately $0 million for the nine months ended September 30, 2020. 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 $0.2 million, to approximately $0.2 million for the nine months ended September 30, 2021, compared to approximately $0 million for the same period in 2020. 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 increased by approximately $9.3million, to approximately $9.3 million during the nine months ended September 30, 2021, from approximately $0 million for the nine months ended September 30, 2020. The increase 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 increased by approximately $32.7 million, by approximately 4253.1 %, from approximately $0.8 million for the nine months ended September 30, 2020 to approximately $32.7 million for the nine months ended September 30, 2021. The increase was mainly due to increased employee compensation.

 

Loss from Operations

 

As a result of the foregoing, loss from operations for the nine months ended September 30, 2021 was approximately $23.4 million, an increase of approximately $22.6 million, or approximately 2964 %, from approximately $0.8 million for the nine months ended September 30, 2020. The increase was mainly due to increased employee compensation.

 

Net Loss (Income)

 

The Company’s net loss increased by approximately $22.6 million, or 597.0%, to approximately $32.2 million net loss for the nine months ended September 30, 2021, from approximately $6.5 million net loss for the same period in 2020. The increase was mainly due to the disposal of certain subsidiaries and employee compensation. 

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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 Rong Hai. 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 except for the warranty revenues where the warranty periods are recognized over the warranty period, usually is a period of twelve months.

 

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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Revenue from equipment and systems, revenue from coating and fuel materials, and revenue from trading and others are recognized at the date of goods delivered and title passed to customers, when a formal arrangement exists, the price is fixed or determinable, the Company has no other significant obligations and collectability is reasonably assured. Such revenues are recognized at a point in time after all performance obligations are satisfied under the new five-step model. In addition, training service revenues are recognized when the services are rendered and the Company has no other obligations, and collectability is reasonably assured. These revenues are recognized at a point in time.

 

Prior to January 1, 2018, the Company allowed its customers to retain 5% to 10% of the contract price as retainage during the warranty period of 12 months to guarantee product quality. Retainage is considered as a payment term included as a part of the contract price, and was recognized as revenue upon the shipment of products. Due to nature of the retainage, the Company’s policy is to record revenue the full value of the contract without VAT, including any retainage, since the Company has experienced insignificant warranty claims historically. Due to the infrequent and insignificant amount of warranty claims, the ability to collect retainage was reasonably assured and was recognized at the time of shipment. On January 1, 2018, upon the adoption of ASU 2014-09 (ASC 606), revenues from product warranty are recognized over the warranty period over 12 months.

 

Payments received before all of the relevant criteria for revenue recognition 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 September 30, 2021, our net working capital was approximately $19.5 million, over 4% 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 $20.0 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 nine months ended September 30, 2021 and 2020.

 

  

For the

Nine Months ended

September 30,

 
  2021  2020 
Net cash (used in) provided by operating activities $(14,598,852) $551,053 
Net cash used in investing activities  (95,241)  (4,469,279)
Net cash provided by financing activities  22,795,019   2,954,983 
Effect of exchange rate change on cash  (25,129)  (56,922)
Net change in cash $8,075,796  $(1,020,165)

  

As of September 30, 2021 and December 31, 2020, the Company had cash in the amount of $8,383,906 and $998,717, respectively. As of September 30, 2021 and December 31, 2020, $7,220,994 and $998,717 and were deposited with various financial institutions located in the PRC, respectively. As of September 30, 2021 and December 31, 2020, $1,162,912 and $0 were deposited with one financial institution located in the United States, respectively.

 

Operating activities

 

Net cash used in operating activities was approximately $14.6 million for the nine months ended September 30, 2021, as compared to approximately $0.5 million net cash provided by operating activities for the nine months ended September 30, 2020. Net cash provided by operating activities was mainly due to the decrease of approximately $0.4 million other receivables, the increase of approximately $21.2 million of prepayments, and the increase of approximately $9.5 million of customer deposits, and the decrease of approximately $0.3 million of taxes payable.

 

Investing activities

 

Net cash used in investing activities was approximately $1 million for the nine months ended September 30, 2021, as compared to approximately $4.5 million net cash used in investing activities for the nine months ended September 30, 2020. Net cash used in investing activities for the nine months ended September 30, 2021 was due to approximately $0.3 million spending on purchase of equipment and $0.3 million by disposal of discontinued operations.

 

Financing activities

 

Net cash provided by financing activities was approximately $22.8 million for the nine months ended September 30, 2021, as compared to approximately $3.0 million net cash used in financing activities for the nine months ended September 30, 2020. Net cash provided by financing activities for the nine months ended September 30, 2021 was due to approximately $0.3 million proceeds from short-term loans – bank and $22.5 million proceeds from issuance of common stock.

 

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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

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (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 company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2021. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective.

 

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

 

Not applicable for smaller reporting companies.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

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

Number

 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 President required by Rule 13a-14(a) or Rule 15d-14(a).
31.3 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 President required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.3 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: November 22, 2021By:/s/ Tingjun Yang
 Name: Tingjun Yang
 Title:Chief Executive Officer and
  (Principal Executive Officer)

 

Date: November 22, 2021By:/s/ Yi Li
 Name: Yi Li
 Title:Chief Financial Officer and Secretary
  (Principal Financial Officer and Principal Accounting Officer)

 

 

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