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.
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.
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.
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
|
|
|
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
Tongrong 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
|
|
|
1
|
Disposed on April 2, 2018
|
2
|
Disposed on December 27,
2018
|
3
|
Disposed on June 30, 2020
|
4
|
Disposed on March 31, 2021
|
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.
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.
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.
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 $167,111 and $935,638 as of March 31, 2021 and December 31,
2020, respectively. The balance sheet amounts, with the exception of shareholders’ equity at March 31, 2021 and December 31, 2020
were translated at 6.57 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 three months ended March 31, 2021 and 2020 were 6.48
RMB and 6.98 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 March 31, 2021 and December 31,
2020, no obsolescence and cost in excess of net realizable value were recognized.
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.
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.
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.
Prior
to January 1, 2018, the Company allowed its customers to retain 5% to 10% of the contract price as warranty retainage during the retainage
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
retainage claims historically. Due to the infrequent and insignificant amount of warranty retainage 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 retainage are recognized over the retainage period over 12 months. For the three months ended March 31, 2021, less
than 5% of our retainage revenues were recognized in our consolidated revenues and included in the Company’s equipment and systems
revenues in the accompanying statements of income and comprehensive income.
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
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenues
–Wuge digital door signs
|
|
$
|
3,380,559
|
|
|
$
|
-
|
|
Total
revenues
|
|
$
|
3,380,559
|
|
|
$
|
-
|
|
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.
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 three months ended March 31, 2021 and 2020. As of
March 31, 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 March 31, 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 three months ended March 31, 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.
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.
Sunlong
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.
Rong
Hai
On
November 30, 2018, the Company entered into a Share Purchase Agreement (the “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 SPA, 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 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.
The
Company’s acquisition of Rong Hai was accounted for as a business combination in accordance with ASC 805. The Company has allocated
the purchase price of Rong Hai 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.
The
Company’s acquisition of Rong Hai was accounted for as a business combination in accordance with ASC 805. The Company has allocated
the purchase price of Rong Hai 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.
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 Rong Hai based on a valuation performed by an independent
valuation firm engaged by the Company:
Total
consideration at fair value
|
|
$
|
9,260,000
|
|
|
|
Fair
Value
|
|
Cash
|
|
$
|
717,056
|
|
Other
current assets
|
|
|
5,980,230
|
|
Plant
and equipment
|
|
|
28,875
|
|
Other
noncurrent assets
|
|
|
116,655
|
|
Goodwill
|
|
|
7,307,470
|
|
Total
asset
|
|
|
14,150,286
|
|
Total
liabilities
|
|
|
(4,890,286
|
)
|
Net
asset acquired
|
|
$
|
9,260,000
|
|
Approximately
$7.3 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of the Company
and Rong Hai. None of the goodwill is expected to be deductible for income tax purposes.
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.
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 Rong Hai
and Wuge because it has both of the following characteristics:
|
(1)
|
The
power to direct activities at Rong Hai and 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 Rong Hai and Wuge
that could potentially be significant to such entity.
|
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:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Current
assets
|
|
$
|
6,208,437
|
|
|
$
|
9,600,157
|
|
Property,
plants and equipment, Intangible Assets
|
|
|
1,466,261
|
|
|
|
1,268,272
|
|
Other
noncurrent assets
|
|
|
-
|
|
|
|
196,415
|
|
Goodwill
|
|
|
7,753,340
|
|
|
|
11,650,157
|
|
Total
assets
|
|
|
15,428,038
|
|
|
|
22,715,001
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
5,715,559
|
|
|
|
8,766,619
|
|
Non-current
liabilities
|
|
|
-
|
|
|
|
33,698
|
|
Total
liabilities
|
|
|
5,715,559
|
|
|
|
8,800,317
|
|
Net
assets
|
|
$
|
9,712,479
|
|
|
$
|
13,914,684
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Short-term
loan
|
|
$
|
-
|
|
|
$
|
475,103
|
|
Accounts
payable
|
|
|
456,531
|
|
|
|
1,037,723
|
|
Other
payables and accrued liabilities
|
|
|
91,043
|
|
|
|
103,323
|
|
Other
payables – related party
|
|
|
1,208,715
|
|
|
|
6,090,841
|
|
Tax
payables
|
|
|
758,190
|
|
|
|
57,815
|
|
Customer
Advances
|
|
|
3,201,080
|
|
|
|
900,522
|
|
Lease
liabilities
|
|
|
-
|
|
|
|
101,292
|
|
Total
current liabilities
|
|
|
5,715,559
|
|
|
|
8,766,619
|
|
Lease
liabilities - noncurrent
|
|
|
-
|
|
|
|
33,698
|
|
Total
liabilities
|
|
$
|
5,715,559
|
|
|
$
|
8,800,317
|
|
The
summarized operating results of the VIE’s are as follows:
|
|
For
the
three months ended
March 31,
2021
|
|
Operating
revenues
|
|
$
|
3,380,559
|
|
Gross
profit
|
|
|
3,375,766
|
|
Loss from
operations
|
|
|
2,939,652
|
|
Net loss
|
|
$
|
2,204,739
|
|
Note
5 – Accounts receivable, net
Accounts
receivable consist of the following:
|
|
March 31,
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:
|
|
March 31,
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:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Raw
materials
|
|
$
|
-
|
|
|
$
|
-
|
|
Work
in progress
|
|
|
-
|
|
|
|
-
|
|
Finished
Goods
|
|
|
-
|
|
|
|
1,047,274
|
|
Total
inventories
|
|
$
|
-
|
|
|
$
|
1,047,274
|
|
Note
7 – Plant and equipment, net
Plant
and equipment consist of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Office
equipment and furniture
|
|
$
|
254,803
|
|
|
$
|
76,605
|
|
Automobile
|
|
|
-
|
|
|
|
272,902
|
|
Subtotal
|
|
|
254,803
|
|
|
|
349,507
|
|
Less:
accumulated depreciation
|
|
|
(6,353
|
)
|
|
|
(266,674
|
)
|
Total
|
|
$
|
248,450
|
|
|
$
|
82,833
|
|
Depreciation
expense for the three months ended March 31, 2021 and 2020 amounted to $5,986 and $3,550, respectively.
Note
8 – Intangible assets, net
Intangible
assets consist of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Development
of technology
|
|
$
|
1,217,416
|
|
|
$
|
1,226,072
|
|
Software
|
|
|
593
|
|
|
|
598
|
|
Less:
accumulated amortization
|
|
|
(198
|
)
|
|
|
(149
|
)
|
Net
intangible assets
|
|
$
|
1,217,811
|
|
|
$
|
1,226,521
|
|
Amortization
expense for the three months ended March 31, 2021 and 2020 amounted to $50 and $0, respectively.
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, 2019
|
|
$
|
3,896,817
|
|
|
$
|
7,753,340
|
|
|
$
|
11,650,157
|
|
Disposal
of the company
|
|
|
(3,896,817
|
)
|
|
|
-
|
|
|
|
(3,896,817
|
)
|
Balance
as of September 30, 2020
|
|
$
|
-
|
|
|
$
|
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
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Chengdu
Yuan Code Chain Technology Co. Ltd
|
|
A company controlled by former
shareholder of the Company
|
|
$
|
490,497
|
|
|
$
|
230,134
|
|
The
Company advanced funds to the related party for technical services.
b.
|
Other payables –
related parties:
|
Name
of related party
|
|
Relationship
|
|
March 31,
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.
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 three months ended March 31, 2021 amounted to approximately $23.7 million. As of March 31, 2021, CCNC’s net operating
loss carry forward for United States income taxes was approximately $5.0 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 three months ended March 31, 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.
Significant
components of the provision for income taxes are as follows:
|
|
For
the
three months ended
March 31,
2021
|
|
|
For
the
three months ended
March 31,
2020
|
|
Current
|
|
$
|
734,913
|
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Total
provision for income taxes
|
|
$
|
734,913
|
|
|
$
|
-
|
|
Deferred
tax assets
Bad
debt allowances must be approved by the Chinese tax authority prior to being deducted as an expense item on the tax return.
Significant
components of deferred tax assets were as follows:
|
|
March
31,
2021
|
|
|
December 31,
2020
|
|
Net
operating losses carried forward – U.S.
|
|
$
|
4,985,736
|
|
|
$
|
303,560
|
|
Net
operating losses carried forward – PRC
|
|
|
-
|
|
|
|
-
|
|
Bad
debt allowance
|
|
|
-
|
|
|
|
127,377
|
|
Valuation
allowance
|
|
|
(4,985,736
|
)
|
|
|
(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:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
VAT
taxes payable
|
|
$
|
23,277
|
|
|
$
|
1,589
|
|
Income
taxes payable
|
|
|
734,913
|
|
|
|
70,914
|
|
Other
taxes payable
|
|
|
-
|
|
|
|
136
|
|
Total
|
|
$
|
758,190
|
|
|
$
|
72,639
|
|
Note
12 – Concentration of risk
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts
receivable. As of March 31, 2021 and December 31, 2020, $5,585,130 and $998,717 and were deposited with various financial institutions
located in the PRC, respectively. As of March 31, 2021 and December 31, 2020, $17,329,875 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 Tongrong 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 Tongrong WFOE.
Tongrong
WFOE, Wuge and Rong Hai 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, Shengrong 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 and Rong Hai 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, Tongrong WFOE, Wuge, and Rong Hai are restricted in their ability to transfer their net assets
to the Company. Foreign exchange and other regulation in the PRC may further restrict Tongrong WFOE, Wuge and Rong Hai from transferring
funds to China Sunlong in the form of dividends, loans and advances. As of September 30, 2020 and December 31, 2019, amounts restricted
are the net assets of Tongrong WFOE, Wuge and Rong Hai which amounted to $2,018,783 and $2,697,561, 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.
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, TMSR Holding Company Limited (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, Code Chain New Continent Limited (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.
On
February 22, 2021, pursuant to a securities purchase agreement (the “Purchase Agreement”) with two institutional investors,
Code Chain New Continent Limited, a Nevada company (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.
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.
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
March
31, 2021
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
1.88
|
|
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
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
March
31, 2021
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
1.88
|
|
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.
The
following represents assets by division as of:
Total
assets as of
|
|
September 30,
2020
|
|
|
December 31,
2020
|
|
Rong
Hai and Tongrong WFOE
|
|
$
|
-
|
|
|
$
|
15,006,063
|
|
Wuge
|
|
|
15,428,038
|
|
|
|
2,304,566
|
|
CCNC,
Citi Profit BVI and TMSR HK
|
|
|
22,217,345
|
|
|
|
7,824,490
|
|
Total
Assets
|
|
$
|
37,645,383
|
|
|
$
|
25,135,119
|
|
Total
revenues of
|
|
March 31,
2021
|
|
|
March 31,
2020
|
|
Rong
Hai and Tongrong WFOE
|
|
$
|
-
|
|
|
$
|
5,165,400
|
|
Wuge
|
|
|
3,380,559
|
|
|
|
-
|
|
CCNC,
Citi Profit BVI and TMSR HK
|
|
|
-
|
|
|
|
-
|
|
Total
revenues
|
|
$
|
3,380,559
|
|
|
$
|
5,165,400
|
|
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
March 31, 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 three months ended March 31, 2021 and 2020.
Results
of Operations
|
|
For
the
three months ended
March 31,
2021
|
|
|
For
the
three months ended
March 31,
2020
|
|
REVENUES
|
|
|
|
|
|
|
|
|
Fuel
materials
|
|
$
|
4,890,734
|
|
|
$
|
5,165,400
|
|
TOTAL
REVENUES
|
|
|
4,890,734
|
|
|
|
5,165,400
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
|
|
|
|
|
|
|
|
Fuel
materials
|
|
|
4,690,388
|
|
|
|
4,982,972
|
|
TOTAL
COST OF REVENUES
|
|
|
4,690,388
|
|
|
|
4,982,972
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
200,346
|
|
|
|
182,428
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES (INCOME)
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
160,254
|
|
|
|
374,521
|
|
Provision
for (recovery of) doubtful accounts
|
|
|
-
|
|
|
|
(635,917
|
)
|
TOTAL
OPERATING EXPENSES
|
|
|
160,254
|
|
|
|
(261,396
|
)
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
40,092
|
|
|
|
443,824
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
75
|
|
|
|
552
|
|
Interest
expense
|
|
|
(7,708
|
)
|
|
|
(2,009
|
)
|
Investment
income
|
|
|
-
|
|
|
|
9,350
|
|
Other
income (expense), net
|
|
|
8
|
|
|
|
-
|
|
Total
other income (expense), net
|
|
|
(7,625
|
)
|
|
|
7,893
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
32,467
|
|
|
|
451,717
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
8,896
|
|
|
|
48,544
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
23,571
|
|
|
$
|
403,173
|
|
Note
17 – Subsequent events
On
April 7, 2021, Mr. Yimin Jin tendered his resignation as a director and Co-Chairman of the Board of Director of Code Chain New Continent
Limited (the “Company”), effective immediately. Mr. Jin’s resignation was not a result of any disagreement with the
Company’s operations, policies or procedures. Mr. Jin remains as the Co-CEO of the Company.
On
April 7, 2021, approved by the Board of Directors, Nominating and Corporate Governance Committee and the Compensation Committee of the
Company, Mr. Zijing (Ryan) Xu was appointed a director and Chief Strategy Officer of the Company, effective immediately.
On
April 16, 2021, the Company entered into an amended and restated asset purchase agreement with ZhanYun Jisuan Co., Ltd., (the “Seller”),
pursuant to which, the Company agreed to purchase and the Seller agreed to sell 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, payable in cash. 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 agreement will have a performance assessment term
of one year from March 19, 2021 to March 19, 2022 (the “Valuation Period”). The Company further agreed to issue to the Seller
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 per machine on behalf of the Company during the Valuation Period (the “Daily Profit”) equals to RMB 200,000
or US$30,800 and if the Assets generate an average net profit per month per machine on behalf of the Company during the Valuation Period
(the “Monthly Profit”) 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 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 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 Buyer 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 25, 2021 in any event. The total number of shares
of common stock, including the Bonus Shares, issuable to the Seller 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 date of the agreement.