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 JM Global Holding Company (“JM Global”), 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 (“Business Combination”). On June 20,
2018, CCNC completed a reincorporation and as a result, the Company changed its state of incorporation from Delaware to
Nevada. 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 (the “Business Combination”) with
JM Global pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”) dated as of August 28, 2017 by and
among (i) JM Global; (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, JM Global 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 JM Global 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 JM Global immediately following the completion of the transaction and JM Global’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 JM Global.
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 (the “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 Purchase Agreement, the Purchasers acquired all of the outstanding
equity interests of Wuhan Host (the “Acquisition”). In exchange for the transfer of 100% equity interest of Wuhan Host,
Purchasers shall pay a total consideration of $11.2 million (“Total Consideration”), of which $5.2 million or RMB equivalent
shall be paid in cash (“Cash Consideration”) and $6.0 million shall be paid in shares of common stock (“Common
Stock”), par value $0.0001, of CCNC (“Share Consideration”). The Parties agree the Share Consideration shall
be an aggregate of 1,293,104 shares of common stock of which is based on the closing price of US$4.64 on March 27, 2018. The Share
Consideration shall be issued in three equal installments, which shall be subject to lock-up of 12, 24 and 36 months, respectively.
The Purchase Agreement contains representations, warranties and covenants customary for acquisitions of this type. The Acquisition
closed on May 1, 2018. Starting on May 1, 2018, the Company’s business activities added the research, development, production
and sale of coating materials.
On August 16, 2018, The Purchasers and
the Sellers entered into a supplement agreement (“Supplement Agreement”), which modified the terms of consideration
set forth in the Purchase Agreement entered between Purchasers and Sellers on April 11, 2018. Pursuant to the Supplement Agreement,
in exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million
(“Total Consideration”), of which $6.5 million or RMB equivalent shall be paid in cash (“Cash Consideration”)
and $4.7 million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of CCNC (“Share
Consideration”). In the Supplement Agreement, both Purchasers and Sellers also agreed to delete the section 3.3 of the Share
Purchase Agreement, a section that stipulates the Share Consideration shall be issued in three equal installments.
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 (“Payment 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 March 31, 2020 is $0.
On November 30, 2018, the Company entered
into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong Huang and Qihuang Wang (collectively
“Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China
engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the 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 (the “EPA”) with Hopeway International Enterprises Limited., a private limited company
duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”). Pursuant to the
EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s
agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the
“Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA 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, the Purchaser 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.
The accompanying consolidated financial
statements reflect the activities of CCNC and each of the following entities:
Name
|
|
Background
|
|
Ownership
|
China Sunlong
|
|
●
|
A Cayman Islands company
|
|
100% owned by the Company
|
Shengrong BVI
|
|
●
●
|
A British Virgin Island company
Incorporated on June 30, 2015
|
|
100% owned by China Sunlong
|
Citi Profit BVI
|
|
|
A British Virgin Island company
Incorporated on April 2019
|
|
100% owned by the Company
|
Shengrong HK
|
|
●
●
|
A Hong Kong company
Incorporated on September 25, 2015
|
|
100% owned by Shengrong BVI
|
TMSR HK
|
|
●
●
|
A Hong Kong company
Incorporated on April 2019
|
|
100% owned by Citi Profit BVI
|
Shengrong WFOE
|
|
●
|
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 WFOE
|
|
●
●
|
A PRC limited liability company and deemed a wholly foreign
owned enterprise (“WFOE”)
Incorporated on August 2019
|
|
100% owned by TMSR HK
|
Hubei Shengrong2
|
|
●
●
|
A PRC limited liability company
Incorporated on January 14, 2009
|
|
100% owned by Shengrong WFOE
|
|
|
●
|
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 HOST
|
|
●
●
●
|
A PRC limited liability company
Incorporated on October 27, 2010
Registered capital of USD 750,075 (RMB 5,000,000), fully funded
|
|
100% owned by Shengrong WFOE
|
|
|
●
|
Research, development, production and sale of coating materials.
|
|
|
Shanghai Host Coating Materials Co., Ltd. (“Shanghai HOST”)
|
|
●
●
●
|
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. (“Xiaogan HOST”)
|
|
●
●
●
●
|
A PRC limited liability company
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
|
|
90% owned by Wuhan HOST
|
Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”)
|
|
●
●
●
●
|
A PRC limited liability company
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
|
|
VIE of Tongrong WFOE
|
Wuge
|
|
●
●
|
A PRC limited liability company
Incorporated on January 3, 2020
|
|
VIE of Tongrong WFOE
|
TJComex BVI1
|
|
●
●
|
A British Virgin Island company
Incorporated on March 8, 2016
|
|
100% owned by China Sunlong
|
TJComex HK1
|
|
●
●
|
A Hong Kong company
Incorporated on March 19, 2014
|
|
100% owned by TJComex BVI
|
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
Incorporated on November 19, 2007
|
|
100% owned by TJComex WFOE
|
|
|
●
|
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
|
Contractual Arrangements
Rong Hai 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”, which were signed on November 30,
2018).
Material terms of each of the Rong Hai VIE
Agreements are described below:
Consulting Services Agreement
Pursuant to the consulting services agreement
between Rong Hai and Shengrong WFOE dated November 30, 2018, Shengrong 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. Shengrong WFOE exclusively owns any intellectual property rights arising from the performance of this
agreement. Shengrong WFOE has the right to determine the service fees based on Rong Hai’s actual operation on a quarterly
basis.
This consulting services agreement shall
take effect on the date of execution of this consulting services agreement and this consulting services agreement shall be in full
force and effective until Rong Hai’s valid operation term expires. Shengrong 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, the shareholders pledged all of their equity
interests in Rong Hai to Shengrong 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,
Shengrong WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests.
This equity pledge agreement shall take
effect on the date of execution of this equity pledge agreement and this equity pledge agreement shall be in full force and effective
until Rong Hai and Shengrong WFOE’s satisfaction of all contractual obligations and settlement of all secured indebtedness.
Upon Shengrong 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, 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, Shengrong WFOE or its designee has the right to acquire any and all of its assets of Rong Hai. Without
Shengrong 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 take effect
on the date of execution of this call option agreement. Rong Hai and Shengrong WFOE shall not terminate this call option agreement
under any circumstances for any reason unless it is early terminated by Shengrong 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 Shengrong 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, 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 shall
take effect on the date of execution of this voting rights proxy agreement and remain in effect indefinitely for the maximum period
of time permitted by law in consideration of Shengrong WFOE.
Operating Agreement
Pursuant to the operating agreement among
Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, 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 Shengrong 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 Shengrong 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 Shengrong 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 shall take effect
on the date of execution of this operating agreement and this operating agreement shall be in full force and effective until Rong
Hai’s valid operation term expires. Either party of Shengrong 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.
All the Rong Hai VIE Agreements became
effective immediately upon their execution.
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 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 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.
Material terms of each of the 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 24, 2020, the Company completed
the Acquisition and issued 4,000,000 shares of TMSR’s common stock to the Wuge Shareholders. The Shares were not registered
under the Securities Act of 1933, as amended (the “Securities Act”). Upon the closing of the Acquisition, the VIE agreements
became effective.
The Company’s Board of Directors
determined that the certain operating subsidiaries, namely, Wuhan Host, and Shengrong WFOE have been designated as discontinued
operations. The Company’s board intends to sell these businesses based on their values as continuing going concerns. The
Company’s assets and liabilities on its consolidated balance sheets at March 31, 2020 and December 31, 2019 and its statements
of operations for the three months ended March 31, 2020 and 2019 have been grouped and re-grouped based on this designation.
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”). Interim
results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q
should be read in conjunction with information included in the Company’s annual report on Form 10-K for the year ended December
31, 2019, filed with the Securities and Exchange Commission on April 17, 2020.
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 $(1,157,206) and $(832,267) as of March 31, 2020 and December 31, 2019, respectively. The
balance sheet amounts, with the exception of shareholders’ equity at March 31, 2020 and December 31, 2019 were translated
at 7.09 RMB and 7.14 RMB to $1.00, respectively. The shareholders’ equity accounts were stated at their historical rate.
The average translation rates applied to statement of income accounts for the three months ended March 31, 2020 and 2019 were 6.98
RMB and 6.75 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.
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 first-in-first-out
method in Shengrong WFOE and weighted average method in Wuhan HOST and Rong Hai. Management reviews inventories for
obsolescence and cost in excess of net realizable value at least annually and recognize an impairment charge against the
inventory when the carrying value exceeds net realizable value. As of March 31, 2020 and December 31, 2019, 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. In 2019, the Company recorded approximately $3.42 million in impairment to its Wuhan Host and Shengrong WFOE operating
units. The entities were located at the epicenter of the COVID 19 virus. Accordingly, those entities were materially adversely
impacted.
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. In 2019, the Company recognized
approximately $4.89 million in impairment to long lived assets related to Wuhan Host and Shengrong WFOE.
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
In Shengrong WFOE, customer deposits represent
amounts advanced by customers on product orders. Generally, the Company requires 3% to 10% advanced deposits from the customers
upon the signing of the sales contracts. At various stages of the sales contract execution, the Company generally collects certain
amounts of advanced deposits from the customers based on the approximate amount of cash flows needed at each stage. Customer deposits
are reduced when the related sale is recognized in accordance with the Company’s revenue recognition policy.
In Wuhan HOST, customer deposits represent
amounts advanced by customers on product orders. Generally, the Company requires 95% to 100% advanced deposits from the customers
upon signing of the sales contracts. A few customers with good credit history are not required to make any deposit. Customer deposits
are reduced when the related sale is recognized in accordance with the Company’s revenue recognition policy.
Revenue recognition
On January 1, 2018, the Company adopted
Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective
method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings
upon adoption of this new guidance as the Company’s revenue, other than retainage revenues, was recognized based on the amount
of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the Company’s
retainage revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.
The core principle underlying the revenue
recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount
that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to
identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time,
based on when control of goods and services transfers to a customer. The Company’s revenue streams are primarily recognized
at a point in time except for the retainage revenues where the retainage periods are recognized over the retainage period, usually
is a period of twelve months.
The ASU requires the use of a new five-step
model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with
the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction
price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the
performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result
in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition
policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new
guidance and confirmed that there were no differences in the pattern of revenue recognition except its retainage revenues.
An entity will also be required to determine
if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement
as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition
of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but does not
control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is
entitled to retain in the exchange.
Revenue from equipment and systems, revenue
from coating and fuel materials, and revenue from trading and others are recognized at the date of goods delivered and title passed
to customers, when a formal arrangement exists, the price is fixed or determinable, the Company has no other significant obligations
and collectability is reasonably assured. Such revenues are recognized at a point in time after all performance obligations are
satisfied under the new five-step model. In addition, training service revenues are recognized when the services are rendered and
the Company has no other obligations, and collectability is reasonably assured. These revenues are recognized at a point in time.
Prior to January 1, 2018, the Company allowed
its customers to retain 5% to 10% of the contract price as warranty retainage during the retainage period of 12 months to guarantee
product quality. Retainage is considered as a payment term included as a part of the contract price, and was recognized as revenue
upon the shipment of products. Due to nature of the retainage, the Company’s policy is to record revenue the full value of
the contract without VAT, including any retainage, since the Company has experienced insignificant warranty retainage claims historically.
Due to the infrequent and insignificant amount of warranty retainage claims, the ability to collect retainage was reasonably assured
and was recognized at the time of shipment. On January 1, 2018, upon the adoption of ASU 2014-09 (ASC 606), revenues from product
warranty retainage are recognized over the retainage period over 12 months. For the three months ended March 31, 2020, less than
5% of our retainage revenues were recognized in our consolidated revenues and included in the Company’s equipment and systems
revenues in the accompanying statements of income and comprehensive income.
Payments received before all of the relevant
criteria for revenue recognition are recorded as customer deposits.
The Company’s disaggregate revenue
streams are summarized as follows:
|
|
For the Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues – Equipment and systems
|
|
$
|
-
|
|
|
$
|
-
|
|
Revenues – Fuel materials
|
|
|
5,165,400
|
|
|
|
4,866,956
|
|
Revenues – Trading and others
|
|
|
-
|
|
|
|
165,829
|
|
Total revenues
|
|
$
|
5,165,400
|
|
|
$
|
5,032,785
|
|
Gross versus Net Revenue Reporting
Starting from July 2016, in the normal
course of the Company’s trading of industrial waste materials business, the Company directly purchases the processed industrial
waste materials from the Company’s suppliers under the Company’s specifications and drop ships the materials directly
to the Company’s customers. The Company would inspect the materials at its customers’ site, during which inspection
it temporarily assumes legal title to the materials, and after which inspection legal title is transferred to its customers. In
these situations, the Company generally collects the sales proceed directly from the Company’s customers and pay for the
inventory purchases to the Company’s suppliers separately. The determination of whether revenues should be reported on a
gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In
determining whether the Company is the principal or an agent, the Company follows the new accounting guidance for principal-agent
considerations. Since the Company is the primary obligor and is responsible for (i) fulfilling the processed industrial waste materials
delivery, (ii) controlling the inventory by temporarily assume legal title to the materials after inspecting the products from
our vendors before passing the materials to our customers, and (iii) bearing the back-end risk of inventory loss with respect to
any product return from the Company’s customers, the Company has concluded that it is the principal in these arrangements,
and therefore report revenues and cost of revenues on a gross basis.
Research and Development
(“R&D”) Expenses
Research and development expenses
include salaries and other compensation-related expenses paid to the Company’s research and product development personnel
while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by
the Company are included in the selling, general and administrative expenses and totaled $0 and $77,590 for the nine months ended
March 31, 2020 and 2019, respectively.
Income taxes
The Company accounts for income taxes in
accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results for the fiscal year as adjusted for
items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted
by the balance sheet date.
Deferred taxes is accounted for using the
asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and
liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax
profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized
to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability
is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged
directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be
realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the
period incurred. The Company incurred no such penalties and interest for the three months ended March 31, 2020 and 2019. As of
March 31, 2020, the Company’s PRC tax returns filed for 2017, 2018 and 2019 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 three months ended March 31, 2020 and 2019, respectively. 824,000 of outstanding options
were excluded from the diluted earnings per share calculation due to its antidilutive effect for the three months ended March 31,
2020 and 2019.
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.
Wuhan HOST
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 (the “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 Purchase Agreement, the Purchasers acquired all of the outstanding
equity interests of Wuhan Host (the “Acquisition”). In exchange for the transfer of 100% equity interest of Wuhan Host,
Purchasers shall pay a total consideration of $11.2 million (“Total Consideration”), of which $ 5.2 million or RMB
equivalent shall be paid in cash (“Cash Consideration”) and $6.0 million shall be paid in shares of common stock (“Common
Stock”), par value $0.0001, of CCNC (“Share Consideration”). The Parties agree the Share Consideration shall
be an aggregate of 1,293,104 shares of common stock of which is based on the closing price of US$4.64 on March 27, 2018. The Share
Consideration shall be issued in three equal installments, which shall be subject to lock-up of 12, 24 and 36 months, respectively.
The Purchase Agreement contains representations, warranties and covenants customary for acquisitions of this type. The Acquisition
closed on May 1, 2018.
On August 16, 2018, The Purchasers and
the Sellers entered into a supplement agreement (“Supplement Agreement”), which modified the terms of consideration
set forth in the Purchase Agreement entered between Purchasers and Sellers on April 11, 2018. Pursuant to the Supplement Agreement,
in exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million
(“Total Consideration”), of which $6.5 million or RMB equivalent shall be paid in cash (“Cash Consideration”)
and $4.7 million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of CCNC (“Share
Consideration”). In the Supplement Agreement, both Purchasers and Sellers also agreed to delete the section 3.3 of the Share
Purchase Agreement, a section that stipulates the Share Consideration shall be issued in three equal installments.
The Company’s acquisition of Wuhan
HOST was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Wuhan
HOST 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 Wuhan HOST based on a valuation performed by an independent valuation firm engaged
by the Company:
Total consideration at fair value
|
|
$
|
11,200,000
|
|
|
|
Fair Value
|
|
Cash
|
|
$
|
276,626
|
|
Other current assets
|
|
|
6,763,767
|
|
Plant and equipment
|
|
|
6,499,268
|
|
Other noncurrent assets
|
|
|
2,139,987
|
|
Goodwill
|
|
|
7,544,008
|
|
Total asset
|
|
|
23,223,656
|
|
Total liabilities
|
|
|
(12,023,656
|
)
|
Net asset acquired
|
|
$
|
11,200,000
|
|
Approximately $7.5 million of goodwill
arising from the acquisition consists largely of synergies expected from combining the operations of the Company and Wuhan HOST.
None of the goodwill is expected to be deductible for income tax purposes.
The Company’s Board of Directors
has determined that it will discontinue Wuhan Host, and identify a buyer for the Wuhan Host in 2020. The Company recognized an
impairment charge of approximately $3.42 million.
Rong Hai
On November 30, 2018, the Company entered
into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong Huang and Qihuang Wang (collectively
“Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China
engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the SPA, CCNC shall issue an aggregate of
4,630,000 shares of CCNC’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement
to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”)
with Shengrong WFOE, through which Shengrong WFOE shall have the right to control, manage and operate Rong Hai in return for a
service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong
WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai Shareholders.
The VIE Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects
to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations,
assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in China. The Acquisition
closed on November 30, 2018.
The Company’s acquisition of Rong
Hai was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Rong
Hai based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Other current
assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the
fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets identified as of the acquisition
date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for
the acquisitions are not material and have been expensed as incurred in general and administrative expense.
The Company’s acquisition of
Rong Hai was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of
Rong Hai based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Other current
assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the
fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets identified as of the acquisition
date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for
the acquisitions are not material and have been expensed as incurred in general and administrative expense.
The following table summarizes the fair
value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price
allocation at the date of the acquisition of Rong Hai based on a valuation performed by an independent valuation firm engaged by
the Company:
Total consideration at fair value
|
|
$
|
9,260,000
|
|
|
|
Fair Value
|
|
Cash
|
|
$
|
717,056
|
|
Other current assets
|
|
|
5,980,230
|
|
Plant and equipment
|
|
|
28,875
|
|
Other noncurrent assets
|
|
|
116,655
|
|
Goodwill
|
|
|
7,307,470
|
|
Total asset
|
|
|
14,150,286
|
|
Total liabilities
|
|
|
(4,890,286
|
)
|
Net asset acquired
|
|
$
|
9,260,000
|
|
Approximately $7.3 million of goodwill
arising from the acquisition consists largely of synergies expected from combining the operations of the Company and Rong Hai.
None of the goodwill is expected to be deductible for income tax purposes.
Hubei Shengrong
On December 27, 2018, the Company, entered
into an Equity Purchase Agreement (the “EPA”) with Hopeway International Enterprises Limited., a private limited company
duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”). Pursuant to the
EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s
agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the
“Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA 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, the Purchaser 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, the results of operations for Hubei Shengrong were not
reported as discontinued operations under the guidance of Accounting Standards Codification 205.
Hopeway is jointly owned by Ms. Jiazhen
Li, the Company’s chief executive officer, and Mr. Xiaonian Zhang, the Company’s president and director. As Hopeway
is a related party under common control with the Company under Ms. Li and Mr. Zhang, no gain or loss are recognized in this disposition
and the net consideration of the transaction are recognized as addition to capital as opposed to a gain. Total fair value of the
consideration of the cancelled 8,523,320 shares of common stock was determined by using the average closing stock price of the
Company held by Hopeway during the period from February 6, 2018 to December 27, 2018 at $3.56 per share.
As of December 27, 2018, the net assets
of Hubei Shengrong and reconciliation of reduction of capital are as follows:
|
|
December 27, 2018
|
|
CURRENT ASSETS
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,994
|
|
Accounts receivable, net
|
|
|
9,410,436
|
|
Accounts receivable - related party, net
|
|
|
761,794
|
|
Other receivables
|
|
|
48,718
|
|
Other receivable - related party
|
|
|
2,158
|
|
Inventories
|
|
|
5,332,990
|
|
Prepayments
|
|
|
31,793,810
|
|
Total current assets
|
|
|
47,397,900
|
|
|
|
|
|
|
PLANT AND EQUIPMENT, NET
|
|
|
203,992
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
Other assets
|
|
|
7,269
|
|
Deferred tax assets
|
|
|
780,550
|
|
Total other assets
|
|
|
787,819
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,389,711
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
Short term loans - bank
|
|
$
|
2,180,708
|
|
Accounts payable
|
|
|
95,854
|
|
Other payables and accrued liabilities
|
|
|
156,498
|
|
Other payables - related parties
|
|
|
507,183
|
|
Customer deposits
|
|
|
347,853
|
|
Taxes payable
|
|
|
16,602,841
|
|
Total current liabilities
|
|
|
19,890,937
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
Deferred rent liabilities
|
|
|
30,763
|
|
Total other liabilities
|
|
|
30,763
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
19,921,700
|
|
|
|
|
|
|
Total net assets
|
|
$
|
28,468,011
|
|
Total consideration
|
|
|
(30,362,135
|
)
|
Currency translation adjustment
|
|
|
900,281
|
|
Total addition to paid-in-capital
|
|
$
|
993,843
|
|
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 June 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 3, 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.
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. Tongrong WFOE is deemed to have a controlling financial interest and be the primary beneficiary of Rong Hai and Wuge because
it has both of the following characteristics:
(1) The power to direct activities at Rong
Hai and Wuge that most significantly impact such entity’s economic performance, and
(2) The obligation to absorb losses of,
and the right to receive benefits from Rong Hai and Wuge that could potentially be significant to such entity.
Accordingly, the accounts of Rong Hai and
Wuge are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial
positions and results of operations are included in the Company’s consolidated financial statements beginning on November
30, 2018.
The carrying amount of the VIE’s
assets and liabilities are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
9,929,501
|
|
|
$
|
8,687,451
|
|
Property, plants and equipment, Intangible Assets
|
|
|
1,161,223
|
|
|
|
19,057
|
|
Other noncurrent assets
|
|
|
93,432
|
|
|
|
127,782
|
|
Goodwill
|
|
|
14,317,717
|
|
|
|
7,289,454
|
|
Total assets
|
|
|
25,501,873
|
|
|
|
16,123,744
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
8,824,997
|
|
|
|
6,067,264
|
|
Non-current liabilities
|
|
|
60,634
|
|
|
|
61,580
|
|
Total liabilities
|
|
|
8,885,631
|
|
|
|
6,128,844
|
|
Net assets
|
|
$
|
16,616,242
|
|
|
$
|
9,994,900
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
437,538
|
|
|
$
|
-
|
|
Accounts payable
|
|
|
934,010
|
|
|
|
619,329
|
|
Other payables and accrued liabilities
|
|
|
30,410
|
|
|
|
301,230
|
|
Other payables – related party
|
|
|
6,461,564
|
|
|
|
5,082,068
|
|
Tax payables
|
|
|
23,809
|
|
|
|
202
|
|
Customer Advances
|
|
|
876,567
|
|
|
|
3,426
|
|
Lease liabilities
|
|
|
61,099
|
|
|
|
61,009
|
|
Total current liabilities
|
|
|
8,824,997
|
|
|
|
6,067,264
|
|
Lease liabilities - noncurrent
|
|
|
60,634
|
|
|
|
61,580
|
|
Total liabilities
|
|
$
|
8,885,631
|
|
|
$
|
6,128,844
|
|
The summarized operating results of the
VIE’s are as follows:
|
|
For the
three months ended
March 31,
|
|
|
|
2020
|
|
|
|
|
|
Operating revenues
|
|
$
|
5,165,400
|
|
Gross profit
|
|
|
183,909
|
|
Income from operations
|
|
|
(171,317
|
)
|
Net income
|
|
$
|
(219,861
|
)
|
Note 5 – Accounts receivable, net
Accounts receivable consist of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
2,535,551
|
|
|
$
|
2,221,319
|
|
Less: Allowance for doubtful accounts
|
|
|
-
|
|
|
|
(24,055
|
)
|
Total accounts receivable, net
|
|
$
|
2,535,551
|
|
|
$
|
2,197,264
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
24,055
|
|
|
$
|
732,846
|
|
Beginning balance from Wuhan HOST
|
|
|
-
|
|
|
|
260,764
|
|
Beginning balance from Rong Hai
|
|
|
24,055
|
|
|
|
472,082
|
|
Addition
|
|
|
-
|
|
|
|
-
|
|
Recovery
|
|
|
(24,055
|
)
|
|
|
(708,791
|
)
|
Exchange rate effect
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
24,055
|
|
Note 6 – Inventories
Inventories consist of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
-
|
|
Work in progress
|
|
|
-
|
|
|
|
-
|
|
Finished Goods
|
|
|
1,176,671
|
|
|
|
1,197,065
|
|
Total inventories
|
|
$
|
1,176,671
|
|
|
$
|
1,197,065
|
|
Note 7 – Plant and equipment, net
Plant and equipment consist of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Office equipment and furniture
|
|
$
|
56,403
|
|
|
$
|
39,688
|
|
Automobile
|
|
|
251,325
|
|
|
|
209,057
|
|
Subtotal
|
|
|
307,728
|
|
|
|
248,745
|
|
Less: accumulated depreciation
|
|
|
(229,737
|
)
|
|
|
(229,688
|
)
|
Total
|
|
$
|
77,991
|
|
|
$
|
19,057
|
|
Depreciation expense for the three months
ended March 31, 2020 and 2019 amounted to $3,550 and $2,468, respectively.
Note 8 – Intangible assets, net
Intangible assets consist of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Development of technology
|
|
$
|
1,129,681
|
|
|
$
|
-
|
|
Less: accumulated amortization
|
|
|
-
|
|
|
|
-
|
|
Net intangible assets
|
|
$
|
1,129,681
|
|
|
$
|
-
|
|
Amortization expense for the three months
ended March 31, 2020 and 2019 amounted to $0 and $0, respectively.
Note 9 – Goodwill
The changes in the carrying amount of goodwill by business units
are as follows:
|
|
Wuhan HOST
|
|
|
Rong Hai
|
|
|
Wuge
|
|
|
Total
|
|
Balance as of December 31, 2019
|
|
$
|
3,424,390
|
|
|
$
|
7,289,454
|
|
|
$
|
-
|
|
|
$
|
10,713,844
|
|
Goodwill acquired through acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
7,140,304
|
|
|
|
7,140,304
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
(112,041
|
)
|
|
|
-
|
|
|
|
(112,041
|
)
|
Balance as of March 31, 2020
|
|
$
|
3,424,390
|
|
|
$
|
7,177,413
|
|
|
$
|
7,140,304
|
|
|
$
|
17,742,107
|
|
Note 10 – Related party balances and transactions
Related party balances
Other payables – related parties:
|
Name of related party
|
|
Relationship
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Chuanliu Ni
|
|
Former shareholder of Wuge
|
|
$
|
325,907
|
|
|
$
|
325,907
|
|
Zhong Hui Holding Limited
|
|
Shareholder of the Company
|
|
|
140,500
|
|
|
|
140,500
|
|
Chengdu Yuan Code Chain Technology Co. LTD
|
|
A company controlled by shareholder of the Company
|
|
|
66,905
|
|
|
|
-
|
|
Qihai Wang
|
|
Shareholder of the Company
|
|
|
115,174
|
|
|
|
166,673
|
|
Jiangsu Longying Education Technology Co. LTD
|
|
A company in which shareholder hold shares
|
|
|
416,367
|
|
|
|
422,868
|
|
Jiangsu Longhai Film Culture Media Co. Ltd
|
|
Under common control of shareholder of the Company
|
|
|
276,637
|
|
|
|
280,954
|
|
Total
|
|
|
|
$
|
1,341,490
|
|
|
$
|
1,336,902
|
|
The above payables represent interest free
loans and advances. These loans and advances are unsecured and due on demand.
Note 11 – Debt
Short term loan
Short term loan due to bank is as follows:
Short term loans
|
|
Maturities
|
|
|
Weighted average interest rate
|
|
|
Collateral/Guarantee
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Loan from Bank of Jiangsu
|
|
|
March 25, 2021
|
|
|
|
4.5
|
%
|
|
Guaranteed by Qihai Wang’s personal property
|
|
$
|
246,997
|
|
|
|
-
|
|
Loan from Bank of Jiangsu
|
|
|
January 12, 2021
|
|
|
|
5.22
|
%
|
|
Guaranteed by Qihai Wang’s personal property
|
|
$
|
190,541
|
|
|
|
-
|
|
Interest expense for the three months ended
March 31, 2020 and 2019 amounted to $2,009 and $7,842, respectively.
Note 12 – Taxes
Income tax
United States
CCNC was organized in the state of Delaware
in April 2015 and re-incorporated in the state of Nevada in June 2018. CCNC’s U.S. net operating loss for the three months
ended March 31, 2020 amounted to approximately $90,000. As of March 31, 2020, CCNC’s net operating loss carry forward for
United States income taxes was approximately $19,000. The net operating loss carry forwards are available to reduce future years’
taxable income through year 2038. Management believes that the realization of the benefits from these losses appears uncertain
due to the Company’s operating history and continued losses in the United States. Accordingly, the Company has provided a
100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management reviews this valuation allowance periodically
and makes changes accordingly.
On December 22, 2017, the “Tax Cuts
and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States. Under the provisions of the Act, the U.S.
corporate tax rate decreased from 34% to 21%. The 2017 Tax Act imposed a global intangible low-taxed income tax (“GILTI”),
which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017
(increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. The Company
determined that there are no impact of GILTI for the three months ended March 31, 2020 and 2019, 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
Shengrong 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
Shengrong 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,
Shengrong 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
Shengrong WFOE, Tongrong WFOE, Wuhan HOST,Wuge
and Rong Hai are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is
calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and
practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises
are subject to income tax at a rate of 25% after appropriate tax adjustments.
Significant components of the provision for income taxes are
as follows:
|
|
For the
three months ended
March 31,
2020
|
|
|
For the
three months ended
March 31,
2019
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
14,610
|
|
|
$
|
16,280
|
|
Deferred
|
|
|
33,935
|
|
|
|
31,238
|
|
Total provision for income taxes
|
|
$
|
48,545
|
|
|
$
|
47,518
|
|
Deferred tax assets
Bad debt allowances must be approved by
the Chinese tax authority prior to being deducted as an expense item on the tax return.
Significant components of deferred tax
assets were as follows:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Net operating losses carried forward – U.S.
|
|
$
|
19,106
|
|
|
$
|
17,309
|
|
Net operating losses carried forward – PRC
|
|
|
-
|
|
|
|
-
|
|
Bad debt allowance
|
|
|
3,529
|
|
|
|
37,532
|
|
Valuation allowance
|
|
|
(19,106
|
)
|
|
|
(17,309
|
)
|
Deferred tax assets, net
|
|
$
|
3,529
|
|
|
$
|
37,532
|
|
Value added tax
Enterprises or individuals who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC
laws. The value added tax (“VAT”) standard rates are 6% to 17% of the gross sales price and changed to 6% to 16% of
gross sales starting in May 2018. The VAT standard rates changed to 6% to 13% of the gross sales prices starting in April 2019.
A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the
Company’s finished products can be used to offset the VAT due on sales of the finished products and services.
Taxes payable consisted of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
VAT taxes payable
|
|
$
|
7,966
|
|
|
$
|
-
|
|
Income taxes payable
|
|
|
14,391
|
|
|
|
-
|
|
Other taxes payable
|
|
|
1,482
|
|
|
|
202
|
|
Total
|
|
$
|
23,839
|
|
|
$
|
202
|
|
Note 13 – Leases
Effective January 1, 2019, the
Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the package of practical expedients that does not require
us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired
or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient
that allows lessees to treat the lease and non-lease components of a lease as a single lease component. The impact of the adoption
on January 1, 2019 increased the right-of-uses and lease liabilities by approximately $298,000.
The Company had an office lease
agreement with a 5-year lease term starting in December 2016 until December 2021 and another office lease agreement with a 5-year
lease term starting in January 2018 until January 2023. Upon adoption of ASU 2016-02, the Company recognized lease labilities of
approximately $298,000, with corresponding Right-of-use (“ROU”) assets of the same amount based on the present value
of the future minimum rental payments of the new lease, using an effective interest rate of 4.75%, which is determined using an
incremental borrowing rate.
The weighted average remaining
lease term of its existing leases is 3.22 years.
The Company’s lease agreements do
not contain any material residual value guarantees or material restrictive covenants.
For the three months ended March
31, 2020 and 2019, rent expenses amounted to $8,081 and $27,971, respectively.
The five-year maturity
of the Company’s lease obligations is presented below:
Twelve months ended March 31,4
|
|
Operating
lease
amount
|
|
2020
|
|
$
|
124,279
|
|
2021
|
|
|
99,423
|
|
2022
|
|
|
76,896
|
|
2023
|
|
|
23,881
|
|
Total lease payments
|
|
|
324,479
|
|
Less: interest
|
|
|
(11,399
|
)
|
Present value of lease liabilities
|
|
$
|
313,080
|
|
Note 14 – Concentration of risk
Credit risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. As of March
31, 2020 and December 31, 2019, no cash were deposited with various financial institutions located in the U.S. As of March 31,
2020 and December 31, 2019, $3,710,974 and $4,003,554 and were deposited with various financial institutions located in the PRC,
respectively. As of March 31, 2020 and December 31, 2019, $378 and $354 were deposited with one financial institution located in
Hong Kong, 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.
Customer and vendor concentration risk
For the three months ended March 31, 2020,
two customers accounted for 53.4% and 39.7% of the Company’s revenues. For the three months ended March 31, 2019, three customers
accounted for 28.0%, 18.4% and 14.1% of the Company’s revenues.
As of March 31, 2020, two customer
accounted for 79.8% and 19.6% of the Company’s accounts receivable; and one customer accounted for 100% of the Company’s
Customer Advances. As of March 31, 2019, one customer accounted for 40.2% of the Company’s accounts receivable.
For the three months ended March 31, 2020,
two suppliers accounted for 52.6% and 32.9c% of the Company’s total purchases. For the three months ended March 31, 2019,
three suppliers accounted for 28.6%, 21.4% and 16.4% of the Company’s total purchases.
As of March 31, 2020, three suppliers accounted
for 58.9%, 19.0% and 10.6% of the Company’s prepayments; and three suppliers accounted for 36.3%, 33.8% and 29.8% of the
Company’s total accounts payable. As of March 31, 2019, three suppliers accounted for 42.2%, 22.0% and 13.2% of the Company’s
prepayments; and three suppliers accounted for 41.7%, 20.7% and 10.5% of the Company’s total accounts payable.
Note 15 – 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 Shengrong 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
Shengrong WFOE.
Shengrong WFOE, Wuhan HOST, Rong Hai are
required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until
such reserve funds reach 50% of its registered capital. In addition, Shengrong WFOE may allocate a portion of its after-tax profits
based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. Wuhan HOST and
Rong Hai may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its
discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends
by a wholly foreign-owned company out of China is subject to examination by the banks designated by State Administration of Foreign
Exchange.
As of March 31, 2020 and December 31, 2019,
Shengrong WFOE, Wuhan HOST, and Rong Hai, collectively attributed $0 of retained earnings for their statutory reserves as
they have accumulated losses.
As a result of the foregoing restrictions,
Shengrong WFOE, Tongrong WFOE, Wuge, Wuhan Host and Rong Hai are restricted in their ability to transfer their net assets to the
Company. Foreign exchange and other regulation in the PRC may further restrict Shengrong WFOE, Tongrong WFOE, Wuge, Wuhan Host
and Rong Hai from transferring funds to China Sunlong in the form of dividends, loans and advances. As of March 31, 2020 and December
31, 2019, amounts restricted are the net assets of Shengrong WFOE, Tongrong WFOE, Wuge, Wuhan Host and Rong Hai which amounted
to $(6,968,513) and $(7,263,520), respectively.
Stock split
On June 1, 2018, the Company’s shareholder
approved a 2 for 1 stock split of the Company’s common stock at the Annual Meeting of Shareholders. The stock split was effected
on June 20, 2018, pursuant to the completion of the reincorporation from Delaware to Nevada. All shares and per share amounts used
herein and in the accompanying consolidated financial statements have been retroactively restated to reflect the stock split.
Common stock
On June 23, 2018, the Company issued an
aggregate of 26,693 shares of the Company’s common stock, par value $0.0001 per share, to certain non-U.S. purchasers at
a purchase price of $5.00 per share for an aggregate offering price of $133,335 pursuant to certain securities purchase agreement
dated April 20, 2018 and June 22, 2018. The issuances were pursuant to the exemption from registration under Regulation S
promulgated under the Securities Act of 1933, as amended.
On February 12, 2019, the Company’s
warrant holders converted 294,971 of the Company’s warrants into 52,077 shares of the Company’s common stock using
cashless exercises method.
On February 20, 2019, the Company’s
warrant holders converted 415,355 of the Company’s warrants into 54,826 shares of the Company’s common stock using
cashless exercises method.
On March 11, 2019, the Board granted an
aggregate of 131,330 shares of restricted common stock, with a fair value of $261,347, determined using the closing price of $1.99
on March 11, 2019, to repay the debt the Company owed to two unrelated third parties. As the carrying value of the debt equaled
to the fair value of the 131,330 common shares at $1.99 per share, no gain or loss were recognized upon this debt settlement.
On March 15, 2019, the Board granted an
aggregate of 142,530 shares of restricted common stock, with a fair value of $290,761, determined using the closing price of $2.04
on March 15, 2019, to repay the debt the Company owed to one unrelated third party. As the carrying value of the debt equaled to
the fair value of the 142,530 common shares at $2.04 per share, no gain or loss were recognized upon this debt settlement.
On April 4, 2019, the Company entered into
certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities
Act of 1933, as amended pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per
share, at a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million.
On November 20, 2019, the company
wrote off 947,037 common shares.
On December 23, 2019, TMSR Holding Company
Limited (the “Company”) entered into certain securities purchase agreement (the “SPA”) with certain “non-U.S.
Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities
Act”) pursuant to which the Company agreed to sell 3,692,859 shares of its common stock (“Common Stock”), par
value $0.0001 per share, at a per share purchase price of $1.00. The net proceeds to the Company from this offering will be approximately
$3.66 million.
On January 3, 2020, the Company entered
into a Share Purchase Agreement with Wuge and all the shareholders of Wuge (“Wuge Shareholders”). Wuge Shareholders
are Wei Xu, Bibo Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network
Technology Co., Ltd., which is controlled by Wei Xu. Pursuant to the SPA, TMSR shall issue an aggregate of 4,000,000 shares of
TMSR’s common stock (“TMSR Shares”) 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.
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
Remaining
|
|
|
|
Warrants
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life
|
|
December 31, 2019
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
3.14
|
|
Granted/Acquired
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
March 31, 2020
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
2.89
|
|
The summary of option activity is as follows:
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Life
|
|
December 31, 2019
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
4.16
|
|
Granted/Acquired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
March 31, 2020
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
2.89
|
|
Note 16 – Contingencies
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.
On February 27, 2013, Wuhan HOST entered
into a contract to purchase land use rights for a parcel of land in E Zhou City, Hubei, China, for $1,212,478. The Company
has paid to the local government $781,349, a balance of $431,129 has not been paid; however, the government has already issued
to the Company all the necessary certificates transferring title of the land use rights for the parcel of land to the Company,
and has not taken action to collect any remaining unpaid balance. If the government determines that it wishes to collect
an unpaid balance, the total cost to the Company would be $431,129.
Note 17 – 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 discontinued
Wuhan Host and Shengrong WFOE. The Company’s remain business segment and operations is JS Ronghai. The Company’s consolidated
results of operations and consolidated financial position from continuing operations are almost all attributable to JS Ronghai;
accordingly, management believes that the consolidated balance sheets and statement of operations provide the relevant information
to assess JS Ronghai’s performance.
The following represents assets by division
as of:
Total assets as of
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Hubei Shengrong and Shengrong WFOE
|
|
$
|
-
|
|
|
$
|
-
|
|
Wuhan HOST
|
|
|
-
|
|
|
|
-
|
|
Rong Hai and Tongrong WFOE
|
|
|
16,107,165
|
|
|
|
17,407,872
|
|
Wuge
|
|
|
1,699,626
|
|
|
|
-
|
|
CCNC, China Sunlong, Shengrong BVI and Shengrong HK
|
|
|
7,211,849
|
|
|
|
71,521
|
|
Total Assets
|
|
$
|
25,018,640
|
|
|
$
|
17,479,393
|
|
Note 18 – Discontinued Operations
The following depicts the financial position
for the discounted operations of Wuhan Host and Shengrong WOFE as of March 31, 2020 and December 31, 2019, and the result of operations
for the discounted operations of Wuhan Host and Sheng WOFE for the three months March 31, 2020 and 2019.
|
|
March 31,
|
|
|
December 31,
|
|
Financial Position
|
|
2020
|
|
|
2019
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,012,766
|
|
|
|
1,543,806
|
|
Total current assets
|
|
|
2,012,766
|
|
|
|
1,543,806
|
|
|
|
|
|
|
|
|
|
|
PLANT AND EQUIPMENT, NET
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,424,390
|
|
|
|
3,424,390
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
-
|
|
Deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
Total other assets
|
|
|
3,424,390
|
|
|
|
3,424,390
|
|
Total assets
|
|
|
5,437,156
|
|
|
|
4,968,196
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,253,025
|
|
|
|
2,288,195
|
|
Other payables and accrued liabilities
|
|
|
1,311,950
|
|
|
|
1,332,430
|
|
Other payables - related parties
|
|
|
3,061,123
|
|
|
|
3,108,908
|
|
Customer deposits
|
|
|
2,972,857
|
|
|
|
3,019,264
|
|
Lease liabilities - current
|
|
|
97,067
|
|
|
|
98,582
|
|
Taxes payable
|
|
|
321,666
|
|
|
|
326,687
|
|
Total current liabilities
|
|
|
10,017,688
|
|
|
|
10,174,066
|
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
Third party loan - noncurrent
|
|
|
141,141
|
|
|
|
143,345
|
|
Lease liabilities - noncurrent
|
|
|
94,280
|
|
|
|
95,752
|
|
Total other liabilities
|
|
|
235,421
|
|
|
|
239,097
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,253,109
|
|
|
|
10,413,163
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
(4,815,953
|
)
|
|
|
(5,444,967
|
)
|
Results of Operations
|
|
For
the
three months
ended
March 31,
2020
|
|
|
For
the
three months
ended
March 31,
2019
|
|
REVENUES
|
|
|
|
|
|
|
Equipment and systems
|
|
$
|
-
|
|
|
$
|
-
|
|
Coating and fuel materials
|
|
|
-
|
|
|
|
2,233,557
|
|
Trading and others
|
|
|
-
|
|
|
|
-
|
|
TOTAL REVENUES
|
|
|
-
|
|
|
|
2,233,557
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
Equipment and systems
|
|
|
-
|
|
|
|
-
|
|
Coating and fuel materials
|
|
|
-
|
|
|
|
2,051,932
|
|
Trading and others
|
|
|
-
|
|
|
|
-
|
|
TOTAL COST OF REVENUES
|
|
|
-
|
|
|
|
2,051,932
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
-
|
|
|
|
181,625
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES (INCOME)
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
506,536
|
|
Provision for (recovery of) doubtful accounts
|
|
|
(500,179
|
)
|
|
|
-
|
|
TOTAL OPERATING EXPENSES
|
|
|
(500,179
|
)
|
|
|
506,536
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
500,179
|
|
|
|
(324,911
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
-
|
|
|
|
692
|
|
other expense
|
|
|
-
|
|
|
|
16,597
|
|
Total other income (expense), net
|
|
|
-
|
|
|
|
17,289
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
500,179
|
|
|
|
(307,622
|
)
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
-
|
|
|
|
3,310
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
500,179
|
|
|
$
|
(310,932
|
)
|
Note 19 – Subsequent events
On April 30, 2020, Tongrong Technology
(Jiangsu) Co., Ltd.(“Tongrong WFOE”), an indirect subsidiary of the Company, entered into a series of assignment agreements
(the “Assignment Agreements”) with Shengrong WFOE, Ronghai and Ronghai Shareholders, pursuant to which Shengrong WFOE
assign all its rights and obligations under the VIE Agreements to Tongrong WFOE (the “Assignment”). The 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.
On May 1, 2020, 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 5,695,073 shares of its common stock (“Common Stock”), par value $0.0001 per share, at a per share purchase
price of $1.50. The gross proceeds to the Company from this offering will be approximately $8.54 million.
The Shares to be issued in the Offering
are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation S promulgated thereunder.
Effective as of May 18, 2020, Code Chain
New Continent Limited (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
(the “Certificate of Amendment”) filed with the Secretary of State of the State of Nevada (the “Name Change”).
In connection with the Name Change, effective
as of the opening of trading on May 18, 2020, the Company’s common stock is trading on the Nasdaq Capital Market under the
ticker symbol “CCNC”. Along with the new ticker symbol, the new CUSIP number for the Company’s common stock is
19200A105.
Also effective as of the opening of trading
on May 18, 2020, the Company’s warrants (the “Warrants”) to purchase one-half of one shares of Common Stock at
a price of $2.88 per half share ($5.75 per whole share) is quoting on the OTC Pink Market under the ticker symbol “CCNCW”.
The new CUSIP number for the Warrants is 19200A113.
Outstanding certificates for the Company’s
common stock and Warrant are not affected by the Name Change and will continue to be valid and need not be exchanged.
The Name Change and Symbol Change have
been approved by the Board and the majority stockholders by written consent on April 1, 2020.