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 Makesi WFOE
|
|
|
●
|
Incorporated on July 4, 2019
|
|
|
|
|
|
|
|
|
TJComex BVI1
|
|
●
|
A British Virgin Island company
|
|
100% owned by China Sunlong
|
|
|
●
|
Incorporated on March 8, 2016
|
|
|
|
|
|
|
|
|
TJComex HK1
|
|
●
|
A Hong Kong company
|
|
100% owned by TJComex BVI
|
|
|
●
|
Incorporated on March 19, 2014
|
|
|
|
|
|
|
|
|
TJComex WFOE1
|
|
●
|
A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)
|
|
100% owned by TJComex HK
|
|
|
●
|
Incorporated on March 10, 2004
|
|
|
|
|
●
|
Registered capital of USD 200,000
|
|
|
|
|
|
|
|
|
TJComex Tianjin1
|
|
●
|
A PRC limited liability company
|
|
100% owned by TJComex WFOE
|
|
|
●
|
Incorporated on November 19, 2007
|
|
|
|
|
●
|
Registered capital of USD 7,809,165 (RMB 55,000,000)
|
|
|
|
|
●
|
General merchandise trading business and related consulting services
|
|
|
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 $199,579 and $935,637 as of September 30, 2021 and December 31, 2020, respectively. The balance sheet amounts,
with the exception of shareholders’ equity at September 30, 2021 and December 31, 2020 were translated at 6.49 RMB and 6.52 RMB
to $1.00, respectively. The shareholders’ equity accounts were stated at their historical rate. The average translation rates applied
to statement of income accounts for the nine months ended September 30, 2021 and 2020 were 6.47 RMB and 6.99 RMB, respectively. Cash flows
are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated balance sheet.
The PRC government imposes significant exchange
restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material
impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
Investments
The Company purchases certain liquid short term
investments such as money market funds and or other short term debt securities marketed by financial institutions. These investments are
not insured against loss of principal. These investments are accounted for as financial instruments that are marked to fair market value
at the end of each reporting period. For investments that are held to maturity debt instruments, which have short maturities, and limited
risk profiles, amortized cost may be the best approximation of their fair value and used for such investments.
Accounts receivable, net
Accounts receivable include trade accounts due
from customers. An allowance for doubtful accounts may be established and recorded based on management’s assessment of potential
losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine
if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance
for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories are comprised of raw materials and
work in progress and are stated at the lower of cost or net realizable value using the weighted average method in Wuge. Management reviews
inventories for obsolescence and cost in excess of net realizable value at least annually and recognize an impairment charge against the
inventory when the carrying value exceeds net realizable value. As of September 30, 2021 and December 31, 2020, no obsolescence and cost
in excess of net realizable value were recognized.
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.
Payments received before all of the relevant criteria
for revenue recognition are recorded as customer deposits.
The Company’s disaggregate revenue streams
are summarized as follows:
|
|
For the
Three Months Ended
September 30,
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues – Wuge digital door signs
|
|
$
|
2,665,702
|
|
|
$
|
-
|
|
|
$
|
9,541,992
|
|
|
$
|
-
|
|
Trading and others
|
|
|
|
|
|
|
(45,759
|
)
|
|
|
-
|
|
|
|
723
|
|
Total revenues
|
|
$
|
2,665,702
|
|
|
$
|
(45,759
|
)
|
|
$
|
9,541,992
|
|
|
$
|
723
|
|
Research and Development (“R&D”)
Expenses
Research and development expenses include salaries
and other compensation-related expenses paid to the Company’s research and product development personnel while they are working
on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in
the selling, general and administrative expenses.
Income taxes
The Company accounts for income taxes in accordance
with U.S. GAAP for income taxes. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are
non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred taxes is accounted for using the asset
and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities
in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle,
deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it
is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated
using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged
or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred
tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for
in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest
incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company incurred no such
penalties and interest for the nine months ended September 30, 2021 and 2020. As of September 30, 2021, the Company’s PRC tax returns
filed for 2018, 2019 and 2020 remain subject to examination by any applicable tax authorities.
Earnings per share
Basic earnings per share are computed by dividing
income available to common shareholders of the Company by the weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if securities or other contracts to issue common shares were exercised
and converted into common shares. 9,079,348 and 10,500,000 of outstanding warrants which is equivalent to convertible of 4,539,674 and
5,250,000 common shares were excluded from the diluted earnings per share calculation due to its antidilutive effect for the nine months
ended September 30, 2021 and 2020, respectively. 824,000 of outstanding options were excluded from the diluted earnings per share calculation
due to its antidilutive effect for the nine months ended September 30, 2021 and 2020.
Recently issued accounting pronouncements
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement –
Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive
income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption
in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued
and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The
amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the
effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe
the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.
The Company does not believe other recently issued
but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed
consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
Note 3 – Business combination and restructuring
TJ Comex BVI
On April 2, 2018, the Company disposed of its subsidiary,
TJComex BVI, in consideration of (i) its minimum contribution to the Company’s results of operation and (ii) the
unsatisfactory synergy between the TJComex BVI business and the rest of the Company’s business. The Company’s decision
to dispose TJComex BVI is to (i) improve the Company’s overall financial condition and results of operations, (ii) reduce
the complexity of the Company’s business, (iii) focus the Company’s resources on the solid
waste recycling business as well as developing environmental control business opportunities; and (iv) make it possible for the Company to pursue
acquisition opportunities for more compatible business. TJComex BVI was disposed to Chuanliu Ni, a Chinese citizen who is the Chief Executive
Officer and director of China Sunlong, for no consideration.
As of April 2, 2018, the net assets of TJComex
BVI were $16,598 and will be recorded as a loss from disposal of subsidiary in the consolidated financial statements for the year ended
December 31, 2018. As TJComex BVI operating revenue was less than 1% of the Company’s revenue and the disposal did not constitute
a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations for
TJComex BVI were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.
Wuge
On January 3, 2020, the Company entered into a
share purchase agreement with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) and all the shareholders of Wuge (“Wuge
Shareholders”). Pursuant to the share purchase agreement, the Company agreed to issue an aggregate of 4,000,000 shares of CCNC’s
common stock to the Wuge Shareholders, in exchange for Wuge Shareholders’ agreement to enter into, and their agreement to cause
Wuge to enter into, certain VIE agreements (“VIE Agreements”) with Tongrong WFOE the Company’s indirectly owned subsidiary,
through which Tongrong WFOE shall have the right to control, manage and operate Wuge in return for a service fee equal to 100% of Wuge’s
net income (the “Acquisition”). On January 3, 2020, Tongrong WFOE entered into a series of VIE Agreements with Wuge and the
Wuge Shareholders. The VIE Agreements are designed to provide Tongrong WFOE with the power, rights and obligations equivalent in all material
respects to those it would possess as the sole equity holder of Wuge, including absolute rights to control the management, operations,
assets, property and revenue of Wuge. Wuge has all necessary license to carry out its business in China.Wuge is a technology company in
development stage. It was incorporated in China in July 2019. Wuge Manor, the game Wuge is developing, is the world’s first game
that combines Internet of Things (IoT) and e-commerce that is based on Code Chain platform. Through the game, players will be able to
have access to hundreds of vendors and business owners in over 100 cities in China, participate in activities those businesses set up
and collect points, which can be redeemed as equipment in the game or coupons usable when making purchase at that business. In addition,
Wuge produced electronic tokens that can be stored in the Code Chain system to purchase virtual property based on real estate. The Acquisition
closed on January 24, 2020.
The Company’s acquisition of Wuge was accounted
for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Wuge based upon the fair value
of the identifiable assets acquired and liabilities assumed on the acquisition date. Other current assets and current liabilities were
valued using the cost approach. Management of the Company is responsible for determining the fair value of assets acquired, liabilities
assumed, plant and equipment, and intangible assets identified as of the acquisition date and considered a number of factors including
valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed
as incurred in general and administrative expense.
The following table summarizes the fair value
of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation
at the date of the acquisition of Wuge based on a valuation performed by an independent valuation firm engaged by the Company:
Total consideration at fair value
|
|
$
|
7,200,000
|
|
|
|
Fair Value
|
|
Cash
|
|
$
|
228,788
|
|
Other current assets
|
|
|
20,834
|
|
Plant and equipment
|
|
|
6,024
|
|
Other noncurrent assets
|
|
|
8,097
|
|
Goodwill
|
|
|
7,343,209
|
|
Total asset
|
|
|
7,606,952
|
|
Total liabilities
|
|
|
(406,952
|
)
|
Net asset acquired
|
|
$
|
7,200,000
|
|
Approximately $7.3 millions of goodwill arising
from the acquisition consists largely of synergies expected from combining the operations of the Company and Wuge. None of the goodwill
is expected to be deductible for income tax purposes.
Note 4 – Variable interest entity
On November 30, 2018, Tongrong WFOE entered into
Contractual Arrangements with Rong Hai and its shareholders upon executing of the “Purchase Agreement”. The significant terms
of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the
Company classifies Rong Hai as VIE.
On January 3, 2020, Tongrong WFOE entered into
Contractual Arrangements with Wuge and its shareholders upon executing of the “Purchase Agreement”. The significant terms
of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the
Company classifies Wuge as VIE.
On January 11, 2021, Makesi WFOE entered into
a series of assignment agreements (the “Assignment Agreements”) with Tongrong WFOE, Wuge and Wuge Shareholders, pursuant to
which Tongrong WFOE assign all its rights and obligations under the VIE Agreements to Makesi WFOE (the “Assignment”). The
VIE Agreements and the Assignment Agreements grant Makesi WFOE with the power, rights and obligations equivalent in all material respects
to those it would possess as the sole equity holder of Wuge, including absolute rights to control the management, operations, assets,
property and revenue of Wuge. The Assignment does not have any impact on Company’s consolidated financial statements.
On March 30, 2021, the Company entered into a
share purchase agreement with a buyer unaffiliated with the Company (the “Buyer”), and Qihai Wang, former director of the
Company (the “Payee”). Pursuant to the agreement, the Company agreed to sell and the Buyer agreed to purchase all the issued
and outstanding ordinary shares (the “Tongrong Shares”) of Tongrong WFOE. The Payee agreed to be responsible for the payment
of the purchase price on behalf of Buyer. The purchase price for the Tongrong Shares shall be $2,464,411, payable in the form of cancelling
426,369 shares of common stock of the Company owned by the Payee (the “CCNC Shares”). The CCNC Shares are valued at $5.78
per share, based on the average closing price of the Company’s common stock during the 30 trading days immediately prior to the
date of the agreement from February 12, 2021 to March 26, 2021. On March 31, 2021, the Company closed the sale of the Tongrong Shares
and caused the CCNC Shares to be cancelled. Tongrong WFOE contractually controls Jaingsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong
Hai”), a variable interest entity of the Company. The disposition of Tongrong WFOE included disposition of Rong Hai.
A VIE is an entity that has either a total equity
investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose
equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected
residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has
a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Makesi WFOE is deemed
to have a controlling financial interest and be the primary beneficiary of Wuge because it has both of the following characteristics:
|
(1)
|
The power to direct activities at Wuge that most significantly impact such entity’s economic performance, and
|
|
(2)
|
The obligation to absorb losses of, and the right to receive benefits from Wuge that could potentially be significant to such entity.
|
Accordingly, the accounts of Rong Hai and Wuge
are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial positions
and results of operations are included in the Company’s consolidated financial statements beginning on November 30, 2018.
The carrying amount of the VIE’s assets
and liabilities are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Current assets
|
|
$
|
9,930,745
|
|
|
$
|
9,600,157
|
|
Property, plants and equipment, Intangible Assets
|
|
|
1,049,564
|
|
|
|
1,268,272
|
|
Other noncurrent assets
|
|
|
-
|
|
|
|
196,415
|
|
Goodwill
|
|
|
7,753,340
|
|
|
|
11,650,157
|
|
Total assets
|
|
|
18,733,649
|
|
|
|
22,715,001
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
12,562,464
|
|
|
|
8,766,619
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
33,698
|
|
Total liabilities
|
|
|
12,562,464
|
|
|
|
8,800,317
|
|
Net assets
|
|
$
|
6,171,185
|
|
|
$
|
13,914,684
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Short-term loan
|
|
$
|
-
|
|
|
$
|
475,103
|
|
Accounts payable
|
|
|
-
|
|
|
|
1,037,723
|
|
Other payables and accrued liabilities
|
|
|
145,235
|
|
|
|
103,323
|
|
Other payables – related party
|
|
|
1,533,225
|
|
|
|
6,090,841
|
|
Tax payables
|
|
|
302,061
|
|
|
|
57,815
|
|
Customer Advances
|
|
|
10,581,943
|
|
|
|
900,522
|
|
Lease liabilities
|
|
|
-
|
|
|
|
101,292
|
|
Total current liabilities
|
|
|
12,562,464
|
|
|
|
8,766,619
|
|
Lease liabilities - noncurrent
|
|
|
-
|
|
|
|
33,698
|
|
Total liabilities
|
|
$
|
12,562,464
|
|
|
$
|
8,800,317
|
|
The summarized operating results of the VIE’s
are as follows:
|
|
For the
nine months ended
September 30,
2021
|
|
Operating revenues
|
|
$
|
9,541,992
|
|
Gross profit
|
|
|
9,384,552
|
|
Loss from operations
|
|
|
(1,368,074
|
)
|
Net loss
|
|
$
|
(1,368,074
|
)
|
Note 5 – Accounts receivable, net
Accounts receivable consist of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Accounts receivable
|
|
$
|
-
|
|
|
$
|
1,670,526
|
|
Less: Allowance for doubtful accounts
|
|
|
-
|
|
|
|
(598,936
|
)
|
Total accounts receivable, net
|
|
$
|
-
|
|
|
$
|
1,071,590
|
|
Movement of allowance for doubtful accounts is
as follows:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
-
|
|
Beginning balance from Wuhan HOST
|
|
|
-
|
|
|
|
-
|
|
Beginning balance from Rong Hai
|
|
|
-
|
|
|
|
24,055
|
|
Addition
|
|
|
-
|
|
|
|
542,087
|
|
Recovery
|
|
|
-
|
|
|
|
-
|
|
Exchange rate effect
|
|
|
-
|
|
|
|
32,794
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
598,936
|
|
Note 6 – Inventories
Inventories consist of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Raw materialsc
|
|
$
|
-
|
|
|
$
|
-
|
|
Work in progress
|
|
|
-
|
|
|
|
-
|
|
Finished Goods
|
|
|
13,473
|
|
|
|
1,047,274
|
|
Total inventories
|
|
$
|
13,473
|
|
|
$
|
1,047,274
|
|
Note 7 – Plant and equipment, net
Plant and equipment consist of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Office equipment and furniture
|
|
$
|
6,262,187
|
|
|
$
|
76,605
|
|
Automobile
|
|
|
216,175
|
|
|
|
272,902
|
|
Subtotal
|
|
|
6,478,362
|
|
|
|
349,507
|
|
Less: accumulated depreciation
|
|
|
(1,237,839
|
)
|
|
|
(266,674
|
)
|
Total
|
|
$
|
5,240,523
|
|
|
$
|
82,833
|
|
Depreciation expense for the nine months ended
September 30, 2021 and 2020 amounted to $1,237,839 and $14,250, respectively.
Note 8 – Intangible assets, net
Intangible assets consist of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Development of technology
|
|
$
|
770,962
|
|
|
$
|
1,226,072
|
|
Bitcoin
|
|
|
2,366,518
|
|
|
|
|
|
Software
|
|
|
601
|
|
|
|
598
|
|
Less: accumulated amortization
|
|
|
(301
|
)
|
|
|
(149
|
)
|
Net intangible assets
|
|
$
|
3,137,780
|
|
|
$
|
1,226,521
|
|
Amortization expense for the nine months ended September
30, 2021 and 2020 amounted to $301 and $112, respectively.
As part of a make good provision in prior capital
transaction entered into by the Company regarding the acquisition of certain crypto-mining machines, the Company received 54 crypto coin
wallets holding Bitcoin with a total aggregate value of approximately $1.81 million. The Company has accounted for these coins as indefinite
life intangible assets. The Company recorded the receipt of such coins as other income in its result of operations for the nine months
ended September 30, 2020.
Note 9 – Goodwill
The changes in the carrying amount of goodwill
by business units are as follows:
|
|
Rong Hai
|
|
|
Wuge
|
|
|
Total
|
|
Balance as of December 31, 2020
|
|
$
|
3,896,817
|
|
|
$
|
7,753,340
|
|
|
$
|
11,650,157
|
|
Disposal of the company
|
|
|
(3,896,817
|
)
|
|
|
-
|
|
|
|
(3,896,817
|
)
|
Balance as of September 30, 2021
|
|
$
|
-
|
|
|
$
|
7,753,340
|
|
|
$
|
7,753,340
|
|
Note 10 – Related party balances and
transactions
Related party balances
|
a.
|
Other receivable – related party:
|
Name of related party
|
|
Relationship
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Chengdu Yuan Code Chain Technology Co. Ltd
|
|
A company controlled by former shareholder of the Company
|
|
$
|
504,456
|
|
|
$
|
230,134
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company advanced funds to the related party
for technical services.
|
b.
|
Other payables – related parties:
|
Name of related party
|
|
Relationship
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Chuanliu Ni
|
|
Chief Executive Officer and director of a former subsidiary
|
|
$
|
325,907
|
|
|
$
|
325,907
|
|
Zhong Hui Holding Limited
|
|
Shareholder of the Company
|
|
|
140,500
|
|
|
|
140,500
|
|
Qihai Wang
|
|
Shareholder of the Company
|
|
|
-
|
|
|
|
24,729
|
|
Total
|
|
|
|
$
|
466,407
|
|
|
$
|
491,136
|
|
The above payables represent interest free loans
and advances. These loans and advances are unsecured and due on demand.
Note 11 – Taxes
Income tax
United States
CCNC was organized in the state of Delaware in
April 2015 and re-incorporated in the state of Nevada in June 2018. CCNC’s U.S. net operating loss for the nine months ended September
30, 2021 amounted to approximately $26.5 million. As of September 30, 2021, CCNC’s net operating loss carry forward for United States
income taxes was approximately $5.6 million. The net operating loss carry forwards are available to reduce future years’ taxable
income through year 2038. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s
operating history and continued losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset to reduce the asset to zero. Management reviews this valuation allowance periodically and makes changes accordingly.
On December 22, 2017, the “Tax Cuts and
Jobs Act” (“The 2017 Tax Act”) was enacted in the United States. Under the provisions of the Act, the U.S. corporate
tax rate decreased from 34% to 21%. The 2017 Tax Act imposed a global intangible low-taxed income tax (“GILTI”), which is
a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125%
for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. The Company determined that there are
no impact of GILTI for the nine months ended September 30, 2021 and 2020, which the Company believes that it will be imposed a minimum
tax rate of 10.5% and to the extent foreign tax credits are available to reduce its US corporate tax, which may result in no additional
US federal income tax being due.
Cayman Islands
China Sunlong is incorporated in the Cayman Islands
and are not subject to tax on income or capital gains under current Cayman Islands law. In addition, upon payments of dividends by China
Sunlong to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Citi Profit BVI is incorporated in the British
Virgin Islands and are not subject to tax on income or capital gains under current British Virgin Islands law. In addition, upon payments
of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
TMSR HK is incorporated in Hong Kong and are subject
to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant
Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as
there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law, TMSR HK is exempted from
income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.
PRC
Makesi WFOE and Wuge are governed by the income
tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the
taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income
Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises are subject to income tax at a rate of 25% after appropriate tax
adjustments.
Deferred tax assets
Bad debt allowances must be approved by the Chinese
tax authority prior to being deducted as an expense item on the tax return.
Significant components of deferred tax assets
were as follows:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Net operating losses carried forward – U.S.
|
|
$
|
5,463,533
|
|
|
$
|
303,560
|
|
Net operating losses carried forward – PRC
|
|
|
-
|
|
|
|
-
|
|
Bad debt allowance
|
|
|
-
|
|
|
|
127,377
|
|
Valuation allowance
|
|
|
(5,463,533
|
)
|
|
|
(303,560
|
)
|
Deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
127,377
|
|
Value added tax
Enterprises or individuals who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC laws. The
value added tax (“VAT”) standard rates are 6% to 17% of the gross sales price and changed to 6% to 16% of gross sales starting
in May 2018. The VAT standard rates changed to 6% to 13% of the gross sales prices starting in April 2019. A credit is available whereby
VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can
be used to offset the VAT due on sales of the finished products and services.
Taxes payable consisted of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
VAT taxes payable
|
|
$
|
302,061
|
|
|
$
|
1,589
|
|
Income taxes payable
|
|
|
-
|
|
|
|
70,914
|
|
Other taxes payable
|
|
|
-
|
|
|
|
136
|
|
Total
|
|
$
|
302,061
|
|
|
$
|
72,639
|
|
Note 12 – Concentration of risk
Credit risk
Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. As of September 30, 2021 and
December 31, 2020, $7,220,994 and $998,717 and were deposited with various financial institutions located in the PRC, respectively. As
of September 30, 2021 and December 31, 2020, $1,162,912 and $0 were deposited with one financial institution located in the U.S., respectively.
While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
Accounts receivable are typically unsecured and
derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of
its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Note 13 – Equity
Restricted net assets
The Company’s ability to pay dividends is
primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations
permit payments of dividends by Makesi WFOE only out of its retained earnings, if any, as determined in accordance with PRC accounting
standards and regulations. The results of operations reflected in the accompanying unaudited condensed consolidated financial statements
prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Makesi WFOE.
Makesi WFOE and Wuge are required to set aside
at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50%
of its registered capital. In addition, Makesi WFOE may allocate a portion of its after-tax profits based on PRC accounting standards
to enterprise expansion fund and staff bonus and welfare fund at its discretion. Wuge may allocate a portion of its after-tax profits
based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary
funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination
by the banks designated by State Administration of Foreign Exchange.
As a result of the foregoing restrictions, Makesi
WFOE and Wuge are restricted in their ability to transfer their net assets to the Company. Foreign exchange and other regulation in the
PRC may further restrict Makesi WFOE and Wuge from transferring funds to China Sunlong in the form of dividends, loans and advances. As
of September 30, 2021 and December 31, 2020, amounts restricted are the net assets of Makesi WFOE and Wuge which amounted to $(1,013,341)
and $(216,935), respectively.
Stock split
On June 1, 2018, the Company’s shareholder
approved a 2 for 1 stock split of the Company’s common stock at the Annual Meeting of Shareholders. The stock split was effected
on June 20, 2018, pursuant to the completion of the reincorporation from Delaware to Nevada. All shares and per share amounts used herein
and in the accompanying consolidated financial statements have been retroactively restated to reflect the stock split.
Common stock
On June 23, 2018, the Company issued an aggregate
of 26,693 shares of the Company’s common stock, par value $0.0001 per share, to certain non-U.S. purchasers at a purchase price
of $5.00 per share for an aggregate offering price of $133,335 pursuant to certain securities purchase agreement dated April 20, 2018
and June 22, 2018. The issuances were pursuant to the exemption from registration under Regulation S promulgated under the Securities
Act of 1933, as amended.
On February 12, 2019, the Company’s warrant
holders converted 294,971 of the Company’s warrants into 52,077 shares of the Company’s common stock using cashless exercises
method.
On February 20, 2019, the Company’s warrant
holders converted 415,355 of the Company’s warrants into 54,826 shares of the Company’s common stock using cashless exercises
method.
On March 11, 2019, the Board granted an aggregate
of 131,330 shares of restricted common stock, with a fair value of $261,347, determined using the closing price of $1.99 on March 11,
2019, to repay the debt the Company owed to two unrelated third parties. As the carrying value of the debt equaled to the fair value of
the 131,330 common shares at $1.99 per share, no gain or loss were recognized upon this debt settlement.
On March 15, 2019, the Board granted an aggregate
of 142,530 shares of restricted common stock, with a fair value of $290,761, determined using the closing price of $2.04 on March 15,
2019, to repay the debt the Company owed to one unrelated third party. As the carrying value of the debt equaled to the fair value of
the 142,530 common shares at $2.04 per share, no gain or loss were recognized upon this debt settlement.
On April 4, 2019, the Company entered into certain
securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as
amended pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per share, at a per share
purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million.
On November 20, 2019, the company wrote off 947,037
common shares.
On December 23, 2019, the Company entered into
certain securities purchase agreement (the “SPA”) with certain “non-U.S. Persons” (the “Purchasers”)
as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the Company
agreed to sell 3,692,859 shares of its common stock (“Common Stock”), par value $0.0001 per share, at a per share purchase
price of $1.00. The net proceeds to the Company from this offering will be approximately $3.66 million.
On January 3, 2020, the Company entered into a
Share Purchase Agreement with Wuge and all the shareholders of Wuge (“Wuge Shareholders”). Wuge Shareholders are Wei Xu, Bibo
Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network Technology Co., Ltd., which
is controlled by Wei Xu. Pursuant to the SPA, TMSR shall issue an aggregate of 4,000,000 shares of TMSR’s common stock to the Wuge
Shareholders, in exchange for Wuge Shareholders’ agreement to enter into, and their agreement to cause Wuge to enter into, certain
VIE agreements (“VIE Agreements”) with Tongrong Technology (Jiangsu) Co., Ltd. (“WFOE”), the Company’s indirectly
owned subsidiary, through which WFOE shall have the right to control, manage and operate Wuge in return for a service fee equal to 100%
of Wuge’s net income (“Acquisition”). On January 24, 2020, the Company completed the Acquisition and issued the Shares
to the Wuge Shareholders.
On June 30, 2020, the Company entered into a share
purchase agreement (the “Agreement”) with Jiazhen Li, former CEO of the Company (the “Buyer”), Long Liao and Chunyong
Zheng, who are former shareholders of Wuhan HOST Coating Materials Co., Ltd., an indirect subsidiary of the Company, (collectively the
“Payees”). Pursuant to the Agreement, the Company agreed to sell and the Buyer agreed to purchase all the issued and outstanding
ordinary shares of China Sunlong Environmental Technology Inc., a Cayman Islands company and a subsidiary of the Company (the “Sunlong
Shares”). The Payees have a prior relationship with the Buyer and have agreed to be responsible for the payment of the purchase
price on behalf of Buyer. The purchase price for the Sunlong Shares shall be $1,732,114, payable in consideration of cancellation of 1,012,932
shares of the Company owned by the Payees (the “CCNC Shares”). The CCNC Shares are valued at $1.71 per share, based on the
closing price of the Company’s common stock on June 30, 2020.
On August 11, 2020, pursuant to certain securities
purchase agreements dated May 1, 2020, the Company issued 1,674,428 shares of its common, at a per share purchase price of $1.50, to the
eleven investors. The gross proceeds to the Company from this private placement were approximately $2.51 million.
On February 22, 2021, pursuant to a securities
purchase agreement (the “Purchase Agreement”) with two institutional investors, the Company , closed (a) a registered direct
offering (the “Registered Direct Offering”) for the sale of (i) 4,166,666 shares of common stock, par value $0.0001 of the
Company (the “Shares”) and (ii) registered investor warrants, with a term of five years, exercisable immediately upon issuance,
to purchase an aggregate of up to 1,639,362 shares of common stock (the “Registered Investor Warrant Shares”) at an exercise
price of $6.72 per share, subject to adjustments thereunder, including a reduction in the exercise price, in the event of a subsequent
offering at a price less than the then current exercise price, to the same price as the price in such offering (a “Price Protection
Adjustment”) (the “Registered Investor Warrants”), and (b) a concurrent private placement (the “Private Placement”
and collectively with the Registered Direct Offering, the “Offering”) for the sale of unregistered investor warrants, with
a term of five and one-half years, first exercisable on the date that is the earlier of (i) six months after the date of issuance or (ii)
the date on which the Company obtains stockholder approval approving the sale of all of the securities offered and sold under the Purchase
Agreement (the “Stockholder Approval”) to purchase an aggregate of up to 2,527,304 shares of common stock (the “Unregistered
Investor Warrant Shares”) at an exercise price of $6.72 per share, subject to adjustments thereunder, including (x) a Price Protection
Adjustment and (y) in the event the exercise price is more than $6.10, a reduction of the exercise price to $6.10, upon obtaining the
Stockholder Approval (the “Unregistered Investor Warrants”). The Shares, the Registered Investor Warrants, the Unregistered
Investor Warrants, the Registered Investor Warrant Shares and the Unregistered Investor Warrant Shares are collectively referred to as
the “Securities.” The Company received gross proceeds from the sale of the Securities of $24,999,996, before deducting placement
agent fees and other Offering expenses. The Company intends to use the net proceeds from this Offering for working capital and general
business purposes.
On February 23, 2021, the Company entered into
an asset purchase agreement with Sichuan RiZhanYun Jisuan Co., Ltd. (the “Seller”), which was amended and restated on April
16, 2021, and further amended on May 28, 2021. Pursuant to the asset purchase agreement, the Company purchased a total of 10,000 Bitcoin
mining machines (the “Assets”) for a total purchase price of RMB 40,000,000 or US$6,160,000 based on the exchange rate as
of April 8, 2021 (the “Purchase Price”), payable in the form of 1,587,800 shares of common stock of the Company, valued at
US$3.88 per share, which is the closing bid price of the common stock of the Company on the Nasdaq Stock Market on April 8, 2021. The
Seller shall cause revenue and any other source of income from the operation of the Assets to be paid to the Company, payable in cryptocurrency
to be deposited into a cryptocurrency wallet held by the Company on a daily basis. The Company shall issue to the Seller or its designees
RMB 5,000,000 or US$770,000 worth of common stock of the Company (the “Bonus Shares”) if the Assets generate an average net
profit per day/10,000 machines (the “Daily Profit”) on behalf of the Company during the one-year period from March 19, 2021
to March 19, 2022 (the “Valuation Period”) equals to RMB 200,000 or US$30,800 and if the Assets generate an average net profit
per month/10,000 machines (the “Monthly Profit”) on behalf of the Company during the Valuation Period equals to RMB 6,000,000
or US$924,000. If the Daily Profit is more than RMB 200,000 or US$30,800 and the Monthly Profit is more than RMB 6,000,000 or US$924,000,
the Company shall issue to the Seller or its designees additional shares of common stock in proportion to the amount that is in excess.
If the Daily Profit is less than RMB 200,000 or US$30,800 or the Monthly Profit is less than RMB 6,000,000 or US$924,000, the Company
shall not issue to the Seller or its designees any Bonus Shares and such month is deemed a “Re-evaluated Month”. At the end
of the Valuation Period, the Monthly Profit of such Re-evaluated Month(s) shall be aggregated (the “Aggregate Profit”), and
the Company shall issue RMB5,000,000 or US$770,000 worth of common stock of the Company for every RMB6,000,000 or US$924,000 in Aggregate
Profit on a pro rata basis. Such Daily Profit and Monthly Profit shall be determined on a monthly basis on the first day of the next month.
Such Bonus Shares and additional shares, when applicable, shall be issued on the fifteenth day of the next month. For any month
that has 28 days or 31 days, the Monthly Profit is calculated based on the actual number of days in the month. Notwithstanding the foregoing,
no share pursuant to this Agreement shall be issued earlier than May 24, 2021 in any event. The total number of shares of common stock,
including the Bonus Shares, issuable to the Seller or its designees pursuant to the Agreement shall in no event be more than 19.99% of
the total shares issued and outstanding of Company as of the February 23, 2021, the date of the asset purchase agreement.
On June 1, 2021, the Company issued to a designee
of the Seller 2,513,294 shares of common stock, consisted of (i) the Purchase Price in the form of 1,587,800 shares of common stock and
(ii) 925,494 Bonus Shares, valued at US$2.51 per share, which is the closing bid price of the common stock of the Company on the Nasdaq
Stock Market on May 12, 2021, for meeting and exceeding the Daily Profit and Monthly Profit benchmark.
On July 28, 2021, the Company entered into an
asset purchase agreement with certain seller(the “Seller”) pursuant to which the Company agreed to purchase from the Seller
digital currency mining machines for a total purchase price of RMB 106,388,672.43, or US$ 16,442,109.95 (based on the exchange rate between
RMB and USD of 1: 6.4705 as of July 8, 2021), payable in the form of 7,647,493 shares of common stock of the Company(“CCNC Shares”).
The CCNC Shares are valued at $2.15 per share. The Company plans to use the assets to further develop its digital currency mining operation.
Warrants and options
On July 29, 2015, the Company sold 10,000,000
units at a purchase price of $5.00 per unit (“Public Units”) in its initial public offering. Each Public Unit consists of
one share of the Company’s common stock, $0.0001 par value, and one warrant. Each warrant will entitle the holder to purchase one-half
of one share of common stock at an exercise price of $2.88 per half share ($5.75 per whole share). Warrants may be exercised only for
a whole number of shares of common stock. No fractional shares will be issued upon exercise of the warrants. The warrants will become
exercisable on 30 days after the consummation of its initial Business Combination with China Sunlong on February 6, 2018. The warrants
will expire February 5, 2023. The warrants will be redeemable by the Company at a price of $0.01 per warrant upon 30 days prior written
notice after the warrants become exercisable, only in the event that the last sale price of the common stock equals or exceeds $12.00
per share for any 20 trading days within a 30-trading day period ending on the third business day prior to the date on which notice of
redemption is given.
The sponsor of the Company purchased, simultaneously
with the closing of the Public Offering on July 29, 2015, 500,000 units at $5.00 per unit in a private placement for an aggregate price
of $2,500,000. Each unit purchased is substantially identical to the units sold in the Public Offering.
The Company sold to the underwriter (and/or its
designees), for $100, as additional compensation, an option to purchase up to a total of 800,000 units exercisable at $5.00 per unit (or
an aggregate exercise price of $4,000,000) upon the closing of the Public Offering. Since the option is not exercisable until the earliest
on the closing the initial Business Combination, the option will effectively represent the right to purchase up to 800,000 shares of common
stock and 800,000 warrants to purchase 400,000 shares at $5.75 per full share for an aggregate maximum amount of $6,300,000. The units
issuable upon exercise of this option are identical to those issued in the Public Offering.
In July 2016, the board of directors of the Company
appointed two new directors. In August 2016, the sponsor of the Company granted an option to each of the two new directors to acquire
12,000 shares of common stock at a price of $4.90 per share vested immediately and exercisable commencing six months after closing of
the initial Business Combination and expiring five years from the closing of the initial Business Combination.
The aforementioned warrants and options are deemed
to be effective on February 6, 2018, the date of the consummation of its initial business combination with China Sunlong, as the Company
was deemed to be the accounting acquiree in the transaction and the transaction was treated as a recapitalization of China Sunlong.
The summary of warrant activity is as follows:
|
|
|
|
|
Exercisable
Into
|
|
|
Weighted
Average
|
|
|
Average
Remaining
|
|
|
|
Warrants
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
December 31, 2020
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
2.13
|
|
Granted/Acquired
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
September 30, 2021
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
1.37
|
|
The summary of option activity is as follows:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
December 31, 2020
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
2.13
|
|
Granted/Acquired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
September 30, 2021
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
1.37
|
|
Note 14 – Commitments and contingencies
Contingencies
From time to time, the Company may be subject
to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal
proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on
its financial position, results of operations or liquidity.
Note 15 – Segment reporting
The Company follows ASC 280, Segment Reporting,
which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and
evaluating their performance. The Company’s chief operating decision maker evaluates performance and determines resource allocations
based on a number of factors, the primary measure being income from operations.
The Company’s has disposed of Tongrong WFOE
and Rong Hai. The Company’s remain business segment and operations is Wuge. The Company’s consolidated results of operations
and consolidated financial position from continuing operations are almost all attributable to Wuge; accordingly, management believes that
the consolidated balance sheets and statement of operations provide the relevant information to assess Wuge’s performance.
The following represents assets by division as
of:
Total assets as of
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Rong Hai and Tongrong WFOE
|
|
$
|
-
|
|
|
$
|
15,006,063
|
|
Wuge
|
|
|
18,425,264
|
|
|
|
2,304,566
|
|
CCNC, Citi Profit BVI and TMSR HK
|
|
|
28,629,122
|
|
|
|
7,824,490
|
|
Total Assets
|
|
$
|
47,054,386
|
|
|
$
|
25,135,119
|
|
Total revenues of
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
Rong Hai and Tongrong WFOE
|
|
$
|
-
|
|
|
$
|
-
|
|
Wuge
|
|
|
9,541,992
|
|
|
|
723
|
|
CCNC, Citi Profit BVI and TMSR HK
|
|
|
-
|
|
|
|
-
|
|
Total revenues
|
|
$
|
9,541,992
|
|
|
$
|
723
|
|
Note 16 – Discontinued Operations
The following depicts the financial position for
the discounted operations of Wuhan Host, Shengrong WOFE, Tongrong WOFE and Rong Hai as of September 30, 2021 and December 31, 2020, and
the result of operations for the discounted operations of Wuhan Host, Shengrong WOFE, Tongrong WOFE and Rong Hai for the nine months ended
September 30, 2021 and 2020. The results of operations for Shengrong HK and China Sunlong have been included in the results of discontinued
operations up to June 30, 2020, which is the date when they were disposed and removed from balance sheet.
Results of Operations
|
|
For the
nine months ended
September 30,
2021
|
|
|
For the
nine months ended
September 30,
2020
|
|
REVENUES
|
|
|
|
|
|
|
Fuel materials
|
|
$
|
4,890,734
|
|
|
$
|
8,956,705
|
|
TOTAL REVENUES
|
|
|
4,890,734
|
|
|
|
8,956,705
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
Fuel materials
|
|
|
4,690,388
|
|
|
|
8,546,438
|
|
TOTAL COST OF REVENUES
|
|
|
4,690,388
|
|
|
|
8,546,438
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
200,346
|
|
|
|
410,267
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES (INCOME)
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
160,254
|
|
|
|
96,245
|
|
Provision for (recovery of) doubtful accounts
|
|
|
-
|
|
|
|
(149,775
|
)
|
TOTAL OPERATING EXPENSES
|
|
|
160,254
|
|
|
|
(53,530
|
)
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
40,092
|
|
|
|
463,797
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
75
|
|
|
|
1,632
|
|
Interest expense
|
|
|
(7,708
|
)
|
|
|
(12,598
|
)
|
Investment income
|
|
|
-
|
|
|
|
14,102
|
|
Other income (expense), net
|
|
|
8
|
|
|
|
-
|
|
Total other income (expense), net
|
|
|
(7,625
|
)
|
|
|
3,136
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
32,467
|
|
|
|
466,933
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
8,896
|
|
|
|
42,159
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
23,571
|
|
|
$
|
424,774
|
|
Note 17 – Subsequent events
On
October 1, 2021, Mr. Weidong (David) Feng tendered his resignation as Co-Chief Executive Officer of the Company, effective October 6,
2021. Mr. Feng’s resignation was not a result of any disagreement with the Company’s operations, policies or procedures.
On
October 1, 2021, Mr. Zijing (Ryan) Xu tendered his resignation as Chief Strategy Officer of the Company, effective October 6, 2021. Mr.
Xu’s resignation was not a result of any disagreement with the Company’s operations, policies or procedures.
On
October 7, 2021, approved by the Board of Directors and the Nominating and Corporate
Governance Committee, Mr. Tingjun Yang, the Chief Executive Officer of the Company,
was appointed as a director of the Company, effective October 7, 2021, until the Company’s next annual meeting of shareholders
and until his successor is duly elected and qualified, or until his earlier death, resignation or removal.