NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 – Nature of business and organization
Code Chain New Continent Limited (the
“Company” or “CCNC”), formerly known as TMSR Holding Company Limited and JM Global Holding Company, was
a blank check company incorporated in Delaware on April 10, 2015. The Company was formed for the purpose of acquiring, through
a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar
business transaction, one or more operating businesses or assets. On June 20, 2018, CCNC completed a reincorporation and as a
result, the Company changed its state of incorporation from Delaware to Nevada (the “Reincorporation”). The Articles
of Incorporation and Bylaws of CCNC Nevada became the governing instruments of the Company, resulting in a 2-for-1 forward stock
split of the Company’s common stock (the “Forward Split). The Reincorporation and Forward Split were approved by shareholders
holding the majority of the outstanding shares of common stock of CCNC Delaware on June 1, 2018 at the Annual Meeting of Shareholders.
On February 6, 2018, China Sunlong Environmental
Technology Inc. (“China Sunlong”) consummated the business combination with the Company pursuant to a Share Exchange
Agreement (the “Share Exchange Agreement”) dated as of August 28, 2017 by and among (i) the Company; (ii) Zhong Hui
Holding Limited; (iii) China Sunlong; (iv) each of the shareholders of China Sunlong named on Annex I of the Share Exchange Agreement
(the “Sellers”); and (v) Chuanliu Ni, a Chinese citizen who is the Chief Executive Officer and director of China Sunlong,
in the capacity as the representative for the Sellers. Pursuant to the Share Exchange Agreement, the Company acquired from the
Sellers all of the issued and outstanding equity interests of China Sunlong in exchange for 17,990,856 newly-issued shares of
common stock of the Company to the Sellers. 1,799,088 of these newly-issued shares are held in escrow for 18 months from the closing
date of the Business Combination as a security for China Sunlong and the Sellers’ indemnification obligations under the
Share Exchange Agreement. This transaction is accounted for as a “reverse merger” and recapitalization at the date
of the consummation of the transaction since the shareholders of China Sunlong owns the majority of the outstanding shares of
the Company immediately following the completion of the transaction and the Company’s operations was the operations of China
Sunlong following the transaction. Accordingly, China Sunlong was deemed to be the accounting acquirer in the transaction and
the transaction was treated as a recapitalization of China Sunlong. The financial statements of China Sunlong prior to February
6, 2018 are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented
in the accompanying consolidated financial statements of the Company.
China Sunlong is a holding company incorporated
on August 31, 2015, under the laws of the Cayman Islands. China Sunlong has no substantive operations other than holding all of
the outstanding share capital of Shengrong Environmental Protection Holding Company Limited (“Shengrong BVI”). Shengrong
BVI is a holding company incorporated on June 30, 2015, under the laws of the British Virgin Islands. Shengrong BVI has no substantive
operations other than holding all of the outstanding share capital of Hong Kong Shengrong Environmental Technology Limited (“Shengrong
HK”). Shengrong HK is also a holding company holding all of the outstanding equity of Shengrong Environmental Protection
Technology (Wuhan) Co., Ltd. (“Shengrong WFOE”).
The Company focuses on the industrial
solid waste recycling and comprehensive utilization. The Company’s main products are high efficiency permanent magnetic
separators and comprehensive utilization systems for industrial solid wastes. The Company’s headquarter is located in Hubei
Province, in the People’s Republic of China (the “PRC” or “China”). All of the Company’s business
activities are carried out by the wholly owned operating Chinese company, Hubei Shengrong Environmental Protection Energy-Saving
Science and Technology Ltd. (“Hubei Shengrong”) prior to May 1, 2018.
On April 11, 2018, the Company, Shengrong
WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries (collectively “Purchasers”),
entered into a Share Purchase Agreement with Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research
Institute, and Hubei Zhonggong Materials Group Co., Ltd. (collectively “Sellers” ) and Wuhan HOST Coating Materials
Co., Ltd. (“Wuhan HOST”), a company incorporated in China engaging in the research, development, production and sale
of coating materials. Pursuant to the Share Purchase Agreement, as supplemented on August 16, 2018, the Purchasers acquired all
of the outstanding equity interests of Wuhan Host. In exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers
shall pay a total consideration of $11.2 million, of which $4.7 million or RMB equivalent shall be paid in cash and $6.0 million
shall be paid in shares of common stock, of CCNC (“Share Consideration”). The Parties agree the Share Consideration
shall be an aggregate of 1,012,932 shares of common stock of which is based on the closing price of US$4.64 on March 27, 2018.
On March 31, 2017, China Sunlong completed
its acquisition of 100% of the equity in TJComex International Group Corporation (“TJComex BVI”). At the closing of
such acquisition, the selling shareholders of TJComex BVI received 5,935 shares of China Sunlong Common Stock valued at $926.71
per share for 100% of their equity in TJComex BVI. TJComex BVI owns 100% of the issued and outstanding capital stock of TJComex
Hong Kong Company Limited (“TJComex HK”), a Hong Kong limited liability company, which owns 100% equity interest of
Tianjin Corro Technological Consulting Co., Ltd. (“TJComex WFOE”), a wholly foreign owned enterprise incorporated
under the laws of the PRC. Pursuant to certain contractual arrangements, TJComex WFOE controls Tianjin Commodity Exchange Co.,
Ltd. (“TJComex Tianjin”), a limited liability company incorporated under the law of the PRC. TJComex Tianjin is engaged
in general merchandise trading business and related consulting services, and its headquarter is located in the city of Tianjin,
PRC.
On April 2, 2018, the Company disposed
of its subsidiary, TJComex BVI in consideration of (i) its minimum contribution to the Company’s results
of operation and (ii) the unsatisfactory synergy between the TJComex BVI business and the rest of the
Company’s business. The Company’s decision to dispose of TJComex BVI is to (i) improve the Company’s
overall financial condition and results of operations, (ii) reduce the complexity of the Company’s business, (iii) focus the Company’s resources
on the solid waste recycling business as well as developing environmental control business opportunities; and (iv) make
it possible for the Company to pursue acquisition opportunities for more compatible businesses. TJComex BVI was
disposed to Chuanliu Ni, a Chinese citizen who is the director of China Sunlong.
As of April 2, 2018, the net assets of
TJComex BVI were $16,598 and is being recorded as a loss from disposal of subsidiary in the consolidated financial statements
for the period ending December 31, 2018. As TJComex BVI operating revenue was less than 1% of the Company’s revenue and
the disposal did not constitute a strategic shift that will have a major effect on the Company’s operations and financial
results, the results of operations for TJComex BVI were not reported as discontinued operations under the guidance of Accounting
Standards Codification 205.
On October 10, 2017, Hubei Shengrong established
a wholly owned subsidiary, Fujian Shengrong Environmental Protection Energy-Saving Science and Technology Ltd. (“Fujian Shengrong”),
with registered capital of RMB 10,000,000 (approximately USD 1,518,120). Fujian Shengrong has no operations prior to May 30, 2018.
On May 30, 2018, Hubei Shengrong and two unrelated entities entered into certain Capital Transfer and Contribution Agreement pursuant
to which these two entities shall contribute cash of approximately USD 5.0 million (RMB 32.0 million) into Fujian Shengrong and
Hubei Shengrong shall contribute approximately USD 1.3 million (RMB 8.0 million) which is the consideration for certain technology
consulting services to be provided by Hubei Shengrong to the two entities. Upon completion of the contribution, the total registered
capital of Fujian Shengrong increased to RMB 40.0 million (approximately USD 6.3 million) and Hubai Shengrong owns 20% and the
two entities collectively own 80% of the equity interest of Fujian Shengrong. In August 2018, Hubei Shengrong transferred 20% equity
interest of Fujian Shengrong to Shengrong WFOE. The Company will account for the investment in Fujian Shengrong using the cost
method. Since Shengrong WFOE did not provide any cash contribution to Fujian Shengrong or technology services, the investment balance
under the cost method investment on September 30, 2020 is $0.
On November 30, 2018, the Company entered
into a Share Purchase Agreement with Jirong Huang and Qihuang Wang (collectively “Sellers”) and Jiangsu Rong
Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China engaging in the sale of fuel materials
and harbor cargo handling services. Pursuant to the Share Purchase Agreement, CCNC shall issue an aggregate of 4,630,000 shares
of CCNC’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement to enter into,
and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”) with Shengrong
WFOE, through which Shengrong WFOE shall have the right to control, manage and operate Rong Hai in return for a service fee approximately
equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong WFOE, the Company’s
indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are
designed to provide Shengrong WFOE with the power, rights and obligations equivalent in all material respects to those it would
possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property
and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in China. The Acquisition closed
on November 30, 2018. Starting on November 30, 2018, the Company’s business activities added coal wholesales and sales of
coke, steels, construction materials, mechanical equipment and steel scrap, of which business activities are carried out in Nantong,
Jiang Su Province, PRC.
On December 27, 2018, the Company, entered
into an Equity Purchase Agreement with Hopeway International Enterprises Limited., a private limited company duly organized under
the laws of British Virgin Islands (the “Hopeway”). Pursuant to the Equity Purchase Agreement, Shengrong WOFE shall
sell 100% equity interests in Hubei Shengrong to Hopeway in exchange for Hopeway’s agreement to irrevocably forfeit and
cancel 8,523,320 shares of common stock of the Company, constituting all the shares owned by Hopeway. The transaction contemplated
by the Equity Purchase Agreement is hereby referred as Disposition. The Company’s decision to dispose of
Hubei Shengrong is due to the planning mandates of Wuhan Municipal Government 2018 which manufactures should move away from city’s
downtown area. Therefore, due to the policy change, Hubei Shengrong is forced to close the existing facility, relocate and build
a new facility, which is expected to take approximately 7-8 years. As a result, Hubei Shengrong will not be able to keep
the production running and will generate no income in the foreseeable future. Management believed it is very difficult, if possible
at all, to continue manufacturing of solid waste recycling systems. As such, the Company has been actively seeking to dispose
Hubei Shengrong while retaining the research and development and sale of solid waste recycling systems business. Upon closing
of the Disposition, Hopeway will become the sole shareholder of Hubei Shengrong and as a result, assume all assets and obligations
of Hubei Shengrong except the research and development team and intellectual property rights in connection with the solid waste
recycling systems business shall be assigned to Shengrong WFOE as part of the Disposition. As Shengrong WFOE has significant continuing
involvement in the sale of solid waste recycling systems business and the processed industrial waste materials trading business,
this restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial
results. Therefore, the results of operations for Hubei Shengrong were not reported as discontinued operations under the guidance
of Accounting Standards Codification 205.
In April 2019, TMSR Holdings Limited (“TMSR
HK”), our indirect wholly owned subsidiary, was incorporated under the laws of Hong Kong.
In August 2019, Tongrong Technology (Jiangsu)
Co., Ltd. (“Tongrong WFOE”), our indirect wholly owned subsidiary, was incorporated under the laws of PRC.
In August 2019, Citi Profit Investment
Holding Limited (“Citi Profit”), an exempted company formed under the laws of the British Virgin Islands, became our
wholly owned subsidiary.
TMSR HK, Tongrong WFOE and Citi Profit
are all holding companies that do not have any substantive business operations.
On January 3, 2020, the Company entered
into a share purchase agreement with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) and all the shareholders of
Wuge, including Wei Xu, Bibo Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren
Network Technology Co., Ltd., which is also controlled by Wei Xu. Pursuant to the share purchase agreement, on January 24, 2020,
the Company issued an aggregate of 4,000,000 shares of TMSR’s common stock to the shareholders of Wuge, in exchange for
Wuge’s shareholders’ agreement to enter into, and their agreement to cause Wuge to enter into, certain VIE agreements
(the “Wuge VIE Agreements”) with Tongrong WFOE, through which Tongrong WFOE has the right to control, manage and operate
Wuge in return for a service fee equal to 100% of Wuge’s net income.
On April 30, 2020, Tongrong WFOE entered
into a series of assignment agreements with Shengrong WFOE, Rong Hai and shareholders of Rong Hai, pursuant to which Shengrong
WFOE assign all its rights and obligations under the Rong Hai VIE Agreements to Tongrong WFOE. The Rong Hai VIE Agreements and
the Assignment Agreements grant Tongrong WFOE with the power, rights and obligations equivalent in all material respects to those
it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets,
property and revenue of Rong Hai. The assignment does not have any impact on Company’s consolidated financial statements.
Effective May 18, 2020, the Company changed
its corporate name from “TMSR Holding Company Limited” to “Code Chain New Continent Limited” pursuant
to a Certificate of Amendment to the Company’s Articles of Incorporation filed with the Secretary of State of the State
of Nevada. In connection with the name change, effective May 18, 2020, the ticker symbol of the Company’s common stock and
warrants changed from “TMSR” and “TMSRW” to “CCNC” and “CCNCW”, respectively.
On June 30, 2020, the Company entered into
a share purchase agreement with Jiazhen Li, former CEO of the Company (the “Buyer”), Long Liao and Chunyong Zheng,
who are former shareholders of Wuhan HOST Coating Materials Co., Ltd., an indirect subsidiary of the Company, (collectively the
“Payees”). Pursuant to the Agreement, the Company agreed to sell, and the Buyer agreed to purchase all the issued and
outstanding ordinary shares of China Sunlong (the “Sunlong Shares”). The Payees have a prior relationship with the
Buyer and have agreed to be responsible for the payment of the purchase price on behalf of Buyer. The purchase price for the Sunlong
Shares shall be $1,732,114, payable in consideration of cancellation of 1,012,932 shares of the Company owned by the Payees (the
“CCNC Shares”). The CCNC Shares are valued at $1.71 per share, based on the closing price of the Company’s common
stock on June 30, 2020. The CCNC Shares were cancelled on August 31, 2020.
The accompanying consolidated financial
statements reflect the activities of CCNC and each of the following entities:
Name
|
|
Background
|
|
Ownership
|
China Sunlong3
|
|
●
|
A Cayman Islands company
|
|
100% owned by the Company
|
Shengrong BVI3
|
|
●
●
|
A British Virgin Island company
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 HK3
|
|
●
●
|
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 WFOE3
|
|
●
|
A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)
|
|
100% owned by Shengrong HK
|
|
|
●
●
●
●
|
Incorporated on March 1, 2016
Registered capital of USD 12,946 (HKD100,000), fully
funded
Purchase and sales of high efficiency permanent magnetic
separator and comprehensive utilization system
Trading of processed industrial waste materials
|
|
|
Tongrong 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 HOST3
|
|
●
●
●
|
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”)3
|
|
●
●
●
|
A PRC limited liability company
Incorporated on December 11, 2014
Registered capital of USD 3,184,371 (RMB 20,000,000),
to be fully funded by November 2024
|
|
|
|
|
●
|
No operations and no capital contribution has been made as of December 31, 2018
|
|
80% owned by Wuhan HOST
|
Wuhan HOST Coating Materials Xiaogan Co., Ltd. (“Xiaogan HOST”)3
|
|
●
●
●
●
|
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 July 4, 2019
|
|
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
|
|
3
|
Disposed on June 30, 2020
|
Contractual Arrangements
Rong Hai and Wuge are controlled through
contractual agreements in lieu of direct equity ownership by the Company or any of its subsidiaries. Such contractual arrangements
consist of a series of five agreements, consulting services agreement, equity pledge agreement, call option agreement, voting
rights proxy agreement, and operating agreement (collectively the “Contractual Arrangements”).
Material terms of each of the Rong Hai VIE
Agreements are described below:
Consulting Services Agreement
Pursuant to the consulting services agreement
between Rong Hai and Shengrong WFOE dated November 30, 2018 and the agreement to assign consulting services agreement among Rong
Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, Tongrong WFOE has the exclusive right to provide consulting services
to Rong Hai relating to Rong Hai’s business, including but not limited to business consulting services, human resources development,
and business development. Tongrong WFOE exclusively owns any intellectual property rights arising from the performance of this
agreement. Tongrong WFOE has the right to determine the service fees based on Rong Hai’s actual operation on a quarterly
basis.
This consulting services agreement took
effect upon execution and shall remain in full force and effective until Rong Hai’s valid operation term expires. Tongrong
WFOE may, at its discretion, decide to renew or terminate this consulting services agreement.
Equity Pledge Agreement.
Under the equity pledge agreement among Shengrong
WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, and the agreement to assign equity pledge agreement among
Rong Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, the shareholders pledged all of their equity interests in Rong
Hai to Tongrong WFOE to guarantee Rong Hai’s performance of relevant obligations and indebtedness under the consulting services
agreement. In addition, the shareholders of Rong Hai have completed the registration of the equity pledge under the agreement with
the competent local authority. If Rong Hai breaches its obligation under the consulting services agreement, Tongrong WFOE, as pledgee,
will be entitled to certain rights, including the right to sell the pledged equity interests.
This equity pledge agreement took effect
upon execution and shall remain in full force and effective until Rong Hai and Tongrong WFOE’s satisfaction of all contractual
obligations and settlement of all secured indebtedness. Upon Tongrong WFOE’s request, Rong Hai shall extend its operation
period to sustain the effectiveness of this equity pledge agreement.
Call Option Agreement
Under the call option agreement among Shengrong
WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018 and the agreement to assign call option agreement among
Rong Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, each of the shareholders of Rong Hai irrevocably granted to WFOE
or its designee an option to purchase at any time, to the extent permitted under PRC law, all or a portion of his equity interests
in Rong Hai. Also, Tongrong WFOE or its designee has the right to acquire any and all of its assets of Rong Hai. Without Tongrong
WFOE’s prior written consent, Rong Hai’s shareholders cannot transfer their equity interests in Rong Hai, and Rong
Hai cannot transfer its assets. The acquisition price for the shares or assets will be the minimum amount of consideration permitted
under the PRC law at the time of the exercise of the option.
This call option agreement shall took effect
upon execution. Rong Hai and Tongrong WFOE shall not terminate this call option agreement under any circumstances for any reason
unless it is early terminated by Tongrong WFOE or by the requirements under the applicable laws. This call option agreement shall
be terminated provided that all equity interest or assets under this option is transferred to Tongrong WFOE or its designee.
Voting Rights Proxy Agreement
Under the voting rights proxy agreement among
Shengrong WFOE and the shareholders of Rong Hai dated November 30, 2018 and the agreement to assign voting rights proxy agreement
among Rong Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, each shareholder of Rong Hai irrevocably appointed Shengrong
WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect
of his equity interests in Rong Hai, including but limited to the power to vote on its behalf on all matters of Rong Hai requiring
shareholder approval in accordance with the articles of association of Rong Hai.
The voting rights proxy agreement took
effect upon execution of and shall remain in effect indefinitely for the maximum period of time permitted by law in consideration
of Tongrong WFOE.
Operating Agreement
Pursuant to the operating agreement among Shengrong
WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018 and the agreement to assign operating agreement among Rong
Hai, Shengrong WFOE and Tongrong WFOE dated April 30, 2020, Rong Hai and the shareholders of Rong Hai agreed not to enter into
any transaction that could materially affect Rong Hai’s assets, obligations, rights or operations without prior written consent
from Tongrong WFOE, including but not limited to the amendment of the articles of association of Rong Hai. Rong Hai and its shareholders
agree to accept and follow our corporate policies provided by Tongrong WFOE in connection with Rong Hai’s daily operations,
financial management and the employment and dismissal of Rong Hai’s employees. Rong Hai agreed that it should seek guarantee
from Tongrong WFOE first if any guarantee is needed for Rong Hai’s performance of any contract or loan in the course of its
business operation.
This operating agreement took effect upon
execution and shall remain in full force and effective until Rong Hai’s valid operation term expires. Either party of Tongrong
WFOE and Rong Hai shall complete approval or registration procedures for the extension of its business term three months prior
to the expiration of its business term, for the purpose of the maintenance of the effectiveness of this operating agreement.
Material terms of each of the Wuge VIE
Agreements are described below:
Technical Consultation and Services
Agreement.
Pursuant to the technical consultation
and services agreement between Wuge and Tongrong WFOE dated January 3, 2020, Tongrong WFOE has the exclusive right to provide
consultation services to Wuge relating to Wuge’s business, including but not limited to business consultation services,
human resources development, and business development. Tongrong WFOE exclusively owns any intellectual property rights arising
from the performance of this agreement. Tongrong WFOE has the right to determine the service fees based on Wuge’s actual
operation on a quarterly basis. This agreement will be effective as long as Wuge exists. Tongrong WFOE may terminate this agreement
at any time by giving a 30 days’ prior written notice to Wuge.
Equity Pledge Agreement.
Under the equity pledge agreement among
Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, Wuge Shareholders pledged all of their equity interests in Wuge
to Tongrong WFOE to guarantee Wuge’s performance of relevant obligations and indebtedness under the technical consultation
and services agreement. In addition, Wuge Shareholders will complete the registration of the equity pledge under the agreement
with the competent local authority. If Wuge breaches its obligation under the technical consultation and services agreement, Tongrong
WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. This pledge will
remain effective until all the guaranteed obligations are performed or the Wuge Shareholders cease to be shareholders of Wuge.
Equity Option Agreement.
Under the equity option agreement among
Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, each of Wuge Shareholders irrevocably granted to Tongrong WFOE
or its designee an option to purchase at any time, to the extent permitted under PRC law, all or a portion of his equity interests
in Wuge. Also, Tongrong WFOE or its designee has the right to acquire any and all of its assets of Wuge. Without Tongrong WFOE’s
prior written consent, Wuge’s shareholders cannot transfer their equity interests in Wuge and Wuge cannot transfer its assets.
The acquisition price for the shares or assets will be the minimum amount of consideration permitted under the PRC law at the
time of the exercise of the option. This pledge will remain effective until all options have been exercised.
Voting Rights Proxy and Financial Support
Agreement.
Under the voting rights proxy and financial
support agreement among Tongrong WFOE, Wuge and Wuge Shareholders dated January 3, 2020, each Wuge Shareholder irrevocably appointed
Tongrong WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder
has in respect of his equity interests in Wuge, including but not limited to the power to vote on its behalf on all matters of
Wuge requiring shareholder approval in accordance with the articles of association of Wuge. The proxy agreement is for a term
of 20 years and can be extended by Tongrong WFOE unilaterally by prior written notice to the other parties.
On June 30, 2020,The Company disposed of
China Sunlong Environmental Technology Inc., The Company’s assets and liabilities on its consolidated balance sheets at September
30, 2020 and December 31, 2019 and its statements of operations for the nine months ended September 30, 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 $(327,087) and $(832,267) as of September 30, 2020 and December 31, 2019, respectively. The
balance sheet amounts, with the exception of shareholders’ equity at September 30, 2020 and December 31, 2019 were translated
at 6.81 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 nine months ended September 30, 2020 and 2019 were
6.99 RMB and 6.78 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 September 30, 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 nine months ended September
30, 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
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues – Equipment and systems
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Revenues – fuel materials
|
|
|
2,511,524
|
|
|
|
3,782,239
|
|
|
|
8,956,705
|
|
|
|
16,067,492
|
|
Revenues – Trading and others
|
|
|
(45,759
|
)
|
|
|
(7,611
|
)
|
|
|
723
|
|
|
|
631,686
|
|
Total revenues
|
|
$
|
2,465,765
|
|
|
$
|
3,774,628
|
|
|
$
|
8,957,428
|
|
|
$
|
16,699,178
|
|
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 $351,794 for the nine months
ended September 30, 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 nine months ended September 30, 2020 and 2019. As
of September 30, 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 nine months ended September 30, 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 nine months ended September
30, 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.
Sunlong
On June 30, 2020, the Company entered
into a share purchase agreement with Jiazhen Li, former CEO of the Company (the “Buyer”), Long Liao and Chunyong Zheng,
who are former shareholders of Wuhan HOST Coating Materials Co., Ltd., an indirect subsidiary of the Company, (collectively the
“Payees”). Pursuant to the Agreement, the Company agreed to sell, and the Buyer agreed to purchase all the issued
and outstanding ordinary shares of China Sunlong (the “Sunlong Shares”). The Payees have a prior relationship with
the Buyer and have agreed to be responsible for the payment of the purchase price on behalf of Buyer. The purchase price for the
Sunlong Shares shall be $1,732,114, payable in consideration of cancellation of 1,012,932 shares of the Company owned by the Payees
(the “CCNC Shares”). The CCNC Shares are valued at $1.71 per share, based on the closing price of the Company’s
common stock on June 30, 2020.
Rong Hai
On November 30, 2018, the Company entered
into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong Huang and Qihuang Wang (collectively
“Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in
China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the SPA, CCNC shall issue an aggregate
of 4,630,000 shares of CCNC’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement
to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”)
with Shengrong WFOE, through which Shengrong WFOE shall have the right to control, manage and operate Rong Hai in return for a
service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong
WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai
Shareholders. The VIE Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material
respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management,
operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in
China. The Acquisition closed on November 30, 2018.
The Company’s acquisition of Rong
Hai was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Rong
Hai based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Other current
assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the
fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets identified as of the acquisition
date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for
the acquisitions are not material and have been expensed as incurred in general and administrative expense.
The Company’s acquisition
of Rong Hai was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price
of Rong Hai based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Other
current assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining
the fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets identified as of the acquisition
date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for
the acquisitions are not material and have been expensed as incurred in general and administrative expense.
The following table summarizes the fair
value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price
allocation at the date of the acquisition of Rong Hai based on a valuation performed by an independent valuation firm engaged
by the Company:
Total consideration at fair value
|
|
$
|
9,260,000
|
|
|
|
Fair Value
|
|
Cash
|
|
$
|
717,056
|
|
Other current assets
|
|
|
5,980,230
|
|
Plant and equipment
|
|
|
28,875
|
|
Other noncurrent assets
|
|
|
116,655
|
|
Goodwill
|
|
|
7,307,470
|
|
Total asset
|
|
|
14,150,286
|
|
Total liabilities
|
|
|
(4,890,286
|
)
|
Net asset acquired
|
|
$
|
9,260,000
|
|
Approximately $7.3 million of goodwill
arising from the acquisition consists largely of synergies expected from combining the operations of the Company and Rong Hai.
None of the goodwill is expected to be deductible for income tax purposes.
Wuge
On January 3, 2020, the Company entered
into a share purchase agreement with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) and all the shareholders of Wuge
(“Wuge Shareholders”). Pursuant to the share purchase agreement, the Company agreed to issue an aggregate of 4,000,000
shares of CCNC’s common stock to the Wuge Shareholders, in exchange for Wuge Shareholders’ agreement to enter into,
and their agreement to cause Wuge to enter into, certain VIE agreements (“VIE Agreements”) with Tongrong WFOE the
Company’s indirectly owned subsidiary, through which Tongrong WFOE shall have the right to control, manage and operate Wuge
in return for a service fee equal to 100% of Wuge’s net income (the “Acquisition”). On January 3, 2020, Tongrong
WFOE entered into a series of VIE Agreements with Wuge and the Wuge Shareholders. The VIE Agreements are designed to provide Tongrong
WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder
of Wuge, including absolute rights to control the management, operations, assets, property and revenue of Wuge. Wuge has all necessary
license to carry out its business in China.Wuge is a technology company in development stage. It was incorporated in China in
July 2019. Wuge Manor, the game Wuge is developing, is the world’s first game that combines Internet of Things (IoT) and
e-commerce that is based on Code Chain platform. Through the game, players will be able to have access to hundreds of vendors
and business owners in over 100 cities in China, participate in activities those businesses set up and collect points, which can
be redeemed as equipment in the game or coupons usable when making purchase at that business. In addition, Wuge produced electronic
tokens that can be stored in the Code Chain system to purchase virtual property based on real estate. The Acquisition closed on
January 24, 2020.
The Company’s acquisition of Wuge
was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Wuge based
upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Other current assets
and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the fair
value of assets acquired, liabilities assumed, plant and equipment, and intangible assets identified as of the acquisition date
and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the
acquisitions are not material and have been expensed as incurred in general and administrative expense.
The following table summarizes the fair
value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price
allocation at the date of the acquisition of Wuge based on a valuation performed by an independent valuation firm engaged by the
Company:
Total consideration at fair value
|
|
$
|
7,200,000
|
|
|
|
Fair Value
|
|
Cash
|
|
$
|
228,788
|
|
Other current assets
|
|
|
20,834
|
|
Plant and equipment
|
|
|
6,024
|
|
Other noncurrent assets
|
|
|
8,097
|
|
Goodwill
|
|
|
7,343,209
|
|
Total asset
|
|
|
7,606,952
|
|
Total liabilities
|
|
|
(406,952
|
)
|
Net asset acquired
|
|
$
|
7,200,000
|
|
Approximately $7.3 millions of goodwill
arising from the acquisition consists largely of synergies expected from combining the operations of the Company and Wuge. None
of the goodwill is expected to be deductible for income tax purposes.
Note 4 – Variable interest entity
On November 30, 2018, Tongrong WFOE entered
into Contractual Arrangements with Rong Hai and its shareholders upon executing of the “Purchase Agreement”. The significant
terms of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As
a result, the Company classifies Rong Hai as VIE.
On January 3, 2020, Tongrong WFOE entered
into Contractual Arrangements with Wuge and its shareholders upon executing of the “Purchase Agreement”. The significant
terms of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As
a result, the Company classifies Wuge as VIE.
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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
10,319,478
|
|
|
$
|
8,687,451
|
|
Property, plants and equipment, Intangible
Assets
|
|
|
1,213,929
|
|
|
|
19,057
|
|
Other noncurrent assets
|
|
|
209,810
|
|
|
|
127,782
|
|
Goodwill
|
|
|
14,895,883
|
|
|
|
7,289,454
|
|
Total assets
|
|
|
26,639,100
|
|
|
|
16,123,744
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
9,647,930
|
|
|
|
6,067,264
|
|
Non-current liabilities
|
|
|
63,082
|
|
|
|
61,580
|
|
Total liabilities
|
|
|
9,711,012
|
|
|
|
6,128,844
|
|
Net assets
|
|
$
|
16,928,088
|
|
|
$
|
9,994,900
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
455,206
|
|
|
$
|
-
|
|
Accounts payable
|
|
|
1,038,629
|
|
|
|
619,329
|
|
Other payables and accrued liabilities
|
|
|
239,053
|
|
|
|
301,230
|
|
Other payables – related party
|
|
|
6,074,958
|
|
|
|
5,082,068
|
|
Tax payables
|
|
|
3,111
|
|
|
|
202
|
|
Customer Advances
|
|
|
1,648,457
|
|
|
|
3,426
|
|
Lease liabilities
|
|
|
65,446
|
|
|
|
61,009
|
|
Total current liabilities
|
|
|
9,524,860
|
|
|
|
6,067,264
|
|
Lease liabilities - noncurrent
|
|
|
186,152
|
|
|
|
61,580
|
|
Total liabilities
|
|
$
|
9,711,012
|
|
|
$
|
6,128,844
|
|
The summarized operating results of the
VIE’s are as follows:
|
|
For the
nine months ended
September 30,
|
|
|
|
2020
|
|
|
|
|
|
Operating revenues
|
|
$
|
8,957,428
|
|
Gross profit
|
|
|
405,967
|
|
Loss from operations
|
|
|
(527,040
|
)
|
Net loss
|
|
$
|
(569,199
|
)
|
Note 5 – Accounts receivable, net
Accounts receivable consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,679,688
|
|
|
$
|
2,221,319
|
|
Less: Allowance for doubtful accounts
|
|
|
(98,766
|
)
|
|
|
(24,055
|
)
|
Total accounts receivable, net
|
|
$
|
1,580,922
|
|
|
$
|
2,197,264
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
September 30,
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
|
|
|
72,190
|
|
|
|
-
|
|
Recovery
|
|
|
-
|
|
|
|
(708,791
|
)
|
Exchange rate effect
|
|
|
2,521
|
|
|
|
-
|
|
Ending balance
|
|
$
|
98,766
|
|
|
$
|
24,055
|
|
Note 6 – Inventories
Inventories consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
-
|
|
Work in progress
|
|
|
-
|
|
|
|
-
|
|
Finished Goods
|
|
|
1,425,148
|
|
|
|
1,197,065
|
|
Total inventories
|
|
$
|
1,425,148
|
|
|
$
|
1,197,065
|
|
Note 7 – Plant and equipment, net
Plant and equipment consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Office equipment and furniture
|
|
$
|
69,612
|
|
|
$
|
39,688
|
|
Automobile
|
|
|
261,473
|
|
|
|
209,057
|
|
Subtotal
|
|
|
331,085
|
|
|
|
248,745
|
|
Less: accumulated depreciation
|
|
|
(250,010
|
)
|
|
|
(229,688
|
)
|
Total
|
|
$
|
81,075
|
|
|
$
|
19,057
|
|
Depreciation expense for the nine months
ended September 30, 2020 and 2019 amounted to $14,252 and $288,928, respectively.
Note 8 – Intangible assets, net
Intangible assets consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Development of technology
|
|
$
|
1,174,725
|
|
|
$
|
-
|
|
Software
|
|
|
573
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
(95
|
)
|
|
|
-
|
|
Net intangible assets
|
|
$
|
1,175,203
|
|
|
$
|
-
|
|
Amortization expense for the nine months
ended September 30, 2020 and 2019 amounted to $93 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
|
|
Disposal of the company
|
|
|
(3,424,390
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,424,390
|
)
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
177,791
|
|
|
|
288,334
|
|
|
|
466,125
|
|
Balance as of September 30, 2020
|
|
$
|
-
|
|
|
$
|
7,467,245
|
|
|
$
|
7,428,638
|
|
|
$
|
14,895,883
|
|
Note 10 – Related party balances and transactions
Related party balances
Other payables – related parties:
Name of related party
|
|
Relationship
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Chuanliu Ni
|
|
Chief Executive Officer and director of a former
subsidiary
|
|
$
|
325,907
|
|
|
$
|
325,907
|
|
Zhong Hui Holding Limited
|
|
Shareholder of the Company
|
|
|
140,500
|
|
|
|
140,500
|
|
Chengdu Yuan Code Chain Technology Co. Ltd
|
|
A company controlled
by former shareholder of the Company
|
|
|
107,822
|
|
|
|
-
|
|
Qihai Wang
|
|
Shareholder of the Company
|
|
|
155,066
|
|
|
|
166,673
|
|
Jiangsu Longying Education Technology Co. Ltd
|
|
A company in which shareholder hold shares
|
|
|
-
|
|
|
|
422,868
|
|
Jiangsu Longhai Film Culture Media Co.
Ltd
|
|
Under common control of shareholder of
the Company
|
|
|
-
|
|
|
|
280,954
|
|
Total
|
|
|
|
$
|
729,295
|
|
|
$
|
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
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Loan from
Bank of Jiangsu
|
|
|
March 25, 2021
|
|
|
|
4.5
|
%
|
|
Guaranteed by Qihai Wang’s personal property
|
|
$
|
256,971
|
|
|
|
-
|
|
Loan from Bank of Jiangsu
|
|
|
January 12, 2021
|
|
|
|
5.22
|
%
|
|
Guaranteed by Qihai Wang’s personal property
|
|
$
|
198,235
|
|
|
|
-
|
|
Interest expense for the three months
ended September 30, 2020 and 2019 amounted to $1,116 and $4,113, respectively, and for the nine months ended September 30, 2020
and 2019 amounted to $12,598 and $21,719, 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 nine months
ended September 30, 2020 amounted to approximately $1.4 million. As of September 30, 2020, CCNC’s net operating loss carry
forward for United States income taxes was approximately $0.29 million. The net operating loss carry forwards are available to
reduce future years’ taxable income through year 2038. Management believes that the realization of the benefits from these
losses appears uncertain due to the Company’s operating history and continued losses in the United States. Accordingly,
the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management reviews
this valuation allowance periodically and makes changes accordingly.
On December 22, 2017, the “Tax Cuts
and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States. Under the provisions of the Act, the U.S.
corporate tax rate decreased from 34% to 21%. The 2017 Tax Act imposed a global intangible low-taxed income tax (“GILTI”),
which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017
(increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. The Company
determined that there are no impact of GILTI for the six months ended September 30, 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
Citi Profit BVI is incorporated in the
British Virgin Islands and are not subject to tax on income or capital gains under current British Virgin Islands law. In addition,
upon payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
TMSR HK is incorporated in Hong Kong and
are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance
with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions for Hong
Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law,
TMSR HK is exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance
of dividends.
PRC
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
September 30,
2020
|
|
|
For the
three months ended
September 30,
2019
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
3,050
|
|
|
$
|
104,959
|
|
Deferred
|
|
|
3,752
|
|
|
|
(46,422
|
)
|
Total provision for income taxes
|
|
$
|
6,802
|
|
|
$
|
58,537
|
|
|
|
For the
nine months ended
September 30,
2020
|
|
|
For the
nine months ended
September 30,
2019
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
19,468
|
|
|
$
|
360,260
|
|
Deferred
|
|
|
37,444
|
|
|
|
(54,651
|
)
|
Total provision for income taxes
|
|
$
|
56,912
|
|
|
$
|
305,609
|
|
Deferred tax assets
Bad debt allowances must be approved by
the Chinese tax authority prior to being deducted as an expense item on the tax return.
Significant components of deferred tax
assets were as follows:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Net operating losses carried forward – U.S.
|
|
$
|
285,384
|
|
|
$
|
17,309
|
|
Net operating losses carried forward – PRC
|
|
|
-
|
|
|
|
-
|
|
Bad debt allowance
|
|
|
-
|
|
|
|
37,532
|
|
Valuation allowance
|
|
|
(285,384
|
)
|
|
|
(17,309
|
)
|
Deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
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:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
VAT taxes payable
|
|
$
|
(332
|
)
|
|
$
|
-
|
|
Income taxes payable
|
|
|
3,043
|
|
|
|
-
|
|
Other taxes payable
|
|
|
400
|
|
|
|
202
|
|
Total
|
|
$
|
3,111
|
|
|
$
|
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 September
30, 2020 and 2019, rent expenses amounted to $8,556 and $25,665, respectively.
For the nine months ended September
30, 2020 and 2019, rent expenses amounted to $24,603 and $76,994, respectively.
The five-year maturity of the
Company’s lease obligations is presented below:
Twelve months ended September 30,
|
|
Operating
lease
amount
|
|
2020
|
|
$
|
71,656
|
|
2021
|
|
|
127,119
|
|
2022
|
|
|
33,127
|
|
2023
|
|
|
24,845
|
|
Total lease payments
|
|
|
256,747
|
|
Less: interest
|
|
|
(5,149
|
)
|
Present value of lease liabilities
|
|
$
|
251,598
|
|
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 September
30, 2020 and December 31, 2019, no cash were deposited with various financial institutions located in the U.S. As of September
30, 2020 and December 31, 2019, $1,463,402 and $4,003,554 and were deposited with various financial institutions located in the
PRC, respectively. As of September 30, 2020 and December 31, 2019, $0 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 September 30,
2020, one customers accounted for 99.4% of the Company’s revenues. For the three months ended September 30, 2019, two customers
accounted for 31.1% and 24.0% of the Company’s revenues.
For the nine months ended September 30,
2020, one customers accounted for 99.4% of the Company’s revenues. For the nine months ended September 30, 2019, four customers
accounted for 17.6%, 17.3%, 13.2% and 10.5% of the Company’s revenues.
As of September 30, 2020, two customer
accounted for 61.0% and 35.8% of the Company’s accounts receivable; and one customer accounted for 100% of the Company’s
Customer Advances. As of September 30, 2019, one customer accounted for 49.9% of the Company’s accounts receivable; and
four customer accounted for 19.0%, 16.5%, 15.6% and 14.2% of the Company’s Customer Advances.
For the three months ended September 30,
2020, four suppliers accounted for 27.1%, 21.8%, 18.1% and 13.5% of the Company’s total purchases. For the three months
ended September 30, 2019, three suppliers accounted for 19.1%, 16.9% and 16.5% of the Company’s total purchases.
For the nine months ended September 30,
2020, three suppliers accounted for 27.6%, 26.2% and 16.6% of the Company’s total purchases. For the nine months ended September
30, 2019, three suppliers accounted for 22.4%, 11.5% and 10.7% of the Company’s total purchases.
As of September 30, 2020, three suppliers
accounted for 44.6%, 33.2% and 10.7% of the Company’s prepayments; and three suppliers accounted for 41.7%, 26.7% and 24.7%
of the Company’s total accounts payable. As of September 30, 2019, two suppliers accounted for 35.1% and 29.3% of the Company’s
prepayments; and one suppliers accounted for 13.9% 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 Tongrong WFOE only out of its retained earnings, if any, as determined in accordance with PRC accounting
standards and regulations. The results of operations reflected in the accompanying unaudited condensed consolidated financial statements
prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Tongrong WFOE.
Tongrong WFOE, Wuge and Rong Hai are required
to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve
funds reach 50% of its registered capital. In addition, Shengrong WFOE may allocate a portion of its after-tax profits based on
PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. Wuge and Rong Hai may
allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion.
The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly
foreign-owned company out of China is subject to examination by the banks designated by State Administration of Foreign Exchange.
As a result of the foregoing restrictions,
Tongrong WFOE, Wuge, and Rong Hai are restricted in their ability to transfer their net assets to the Company. Foreign exchange
and other regulation in the PRC may further restrict Tongrong WFOE, Wuge and Rong Hai from transferring funds to China Sunlong
in the form of dividends, loans and advances. As of September 30, 2020 and December 31, 2019, amounts restricted are the net assets
of Tongrong WFOE, Wuge and Rong Hai which amounted to $2,018,783 and $2,697,561, respectively.
Stock split
On June 1, 2018, the Company’s shareholder
approved a 2 for 1 stock split of the Company’s common stock at the Annual Meeting of Shareholders. The stock split was
effected on June 20, 2018, pursuant to the completion of the reincorporation from Delaware to Nevada. All shares and per share
amounts used herein and in the accompanying consolidated financial statements have been retroactively restated to reflect the
stock split.
Common stock
On June 23, 2018, the Company issued an
aggregate of 26,693 shares of the Company’s common stock, par value $0.0001 per share, to certain non-U.S. purchasers at
a purchase price of $5.00 per share for an aggregate offering price of $133,335 pursuant to certain securities purchase agreement
dated April 20, 2018 and June 22, 2018. The issuances were pursuant to the exemption from registration under Regulation
S promulgated under the Securities Act of 1933, as amended.
On February 12, 2019, the Company’s
warrant holders converted 294,971 of the Company’s warrants into 52,077 shares of the Company’s common stock using
cashless exercises method.
On February 20, 2019, the Company’s
warrant holders converted 415,355 of the Company’s warrants into 54,826 shares of the Company’s common stock using
cashless exercises method.
On March 11, 2019, the Board granted an
aggregate of 131,330 shares of restricted common stock, with a fair value of $261,347, determined using the closing price of $1.99
on March 11, 2019, to repay the debt the Company owed to two unrelated third parties. As the carrying value of the debt equaled
to the fair value of the 131,330 common shares at $1.99 per share, no gain or loss were recognized upon this debt settlement.
On March 15, 2019, the Board granted an
aggregate of 142,530 shares of restricted common stock, with a fair value of $290,761, determined using the closing price of $2.04
on March 15, 2019, to repay the debt the Company owed to one unrelated third party. As the carrying value of the debt equaled
to the fair value of the 142,530 common shares at $2.04 per share, no gain or loss were recognized upon this debt settlement.
On April 4, 2019, the Company entered
into certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities
Act of 1933, as amended pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per
share, at a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million.
On November 20, 2019, the company wrote
off 947,037 common shares.
On December 23, 2019, TMSR Holding Company
Limited (the “Company”) entered into certain securities purchase agreement (the “SPA”) with certain “non-U.S.
Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities
Act”) pursuant to which the Company agreed to sell 3,692,859 shares of its common stock (“Common Stock”), par
value $0.0001 per share, at a per share purchase price of $1.00. The net proceeds to the Company from this offering will be approximately
$3.66 million.
On January 3, 2020, the Company entered
into a Share Purchase Agreement with Wuge and all the shareholders of Wuge (“Wuge Shareholders”). Wuge Shareholders
are Wei Xu, Bibo Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network
Technology Co., Ltd., which is controlled by Wei Xu. Pursuant to the SPA, TMSR shall issue an aggregate of 4,000,000 shares of
TMSR’s common stock to the Wuge Shareholders, in exchange for Wuge Shareholders’ agreement to enter into, and their
agreement to cause Wuge to enter into, certain VIE agreements (“VIE Agreements”) with Tongrong Technology (Jiangsu)
Co., Ltd. (“WFOE”), the Company’s indirectly owned subsidiary, through which WFOE shall have the right to control,
manage and operate Wuge in return for a service fee equal to 100% of Wuge’s net income (“Acquisition”). On January
24, 2020, the Company completed the Acquisition and issued the Shares to the Wuge Shareholders.
On June 30, 2020, Code Chain New Continent
Limited (the “Company”) entered into a share purchase agreement (the “Agreement”) with Jiazhen Li, former
CEO of the Company (the “Buyer”), Long Liao and Chunyong Zheng, who are former shareholders of Wuhan HOST Coating
Materials Co., Ltd., an indirect subsidiary of the Company, (collectively the “Payees”). Pursuant to the Agreement,
the Company agreed to sell and the Buyer agreed to purchase all the issued and outstanding ordinary shares of China Sunlong Environmental
Technology Inc., a Cayman Islands company and a subsidiary of the Company (the “Sunlong Shares”). The Payees have
a prior relationship with the Buyer and have agreed to be responsible for the payment of the purchase price on behalf of Buyer.
The purchase price for the Sunlong Shares shall be $1,732,114, payable in consideration of cancellation of 1,012,932 shares of
the Company owned by the Payees (the “CCNC Shares”). The CCNC Shares are valued at $1.71 per share, based on the closing
price of the Company’s common stock on June 30, 2020.
On August 11, 2020, pursuant to certain
securities purchase agreements dated May 1, 2020, the Company issued 1,674,428 shares of its common, at a per share purchase price
of $1.50, to the eleven investors. The gross proceeds to the Company from this private placement were approximately $2.51 million.
Warrants and options
On July 29, 2015, the Company sold 10,000,000
units at a purchase price of $5.00 per unit (“Public Units”) in its initial public offering. Each Public Unit consists
of one share of the Company’s common stock, $0.0001 par value, and one warrant. Each warrant will entitle the holder to
purchase one-half of one share of common stock at an exercise price of $2.88 per half share ($5.75 per whole share). Warrants
may be exercised only for a whole number of shares of common stock. No fractional shares will be issued upon exercise of the warrants.
The warrants will become exercisable on 30 days after the consummation of its initial Business Combination with China Sunlong
on February 6, 2018. The warrants will expire February 5, 2023. The warrants will be redeemable by the Company at a price of $0.01
per warrant upon 30 days prior written notice after the warrants become exercisable, only in the event that the last sale price
of the common stock equals or exceeds $12.00 per share for any 20 trading days within a 30-trading day period ending on the third
business day prior to the date on which notice of redemption is given.
The sponsor of the Company purchased,
simultaneously with the closing of the Public Offering on July 29, 2015, 500,000 units at $5.00 per unit in a private placement
for an aggregate price of $2,500,000. Each unit purchased is substantially identical to the units sold in the Public Offering.
The Company sold to the underwriter (and/or
its designees), for $100, as additional compensation, an option to purchase up to a total of 800,000 units exercisable at $5.00
per unit (or an aggregate exercise price of $4,000,000) upon the closing of the Public Offering. Since the option is not exercisable
until the earliest on the closing the initial Business Combination, the option will effectively represent the right to purchase
up to 800,000 shares of common stock and 800,000 warrants to purchase 400,000 shares at $5.75 per full share for an aggregate
maximum amount of $6,300,000. The units issuable upon exercise of this option are identical to those issued in the Public Offering.
In July 2016, the board of directors of
the Company appointed two new directors. In August 2016, the sponsor of the Company granted an option to each of the two
new directors to acquire 12,000 shares of common stock at a price of $4.90 per share vested immediately and exercisable commencing
six months after closing of the initial Business Combination and expiring five years from the closing of the initial Business
Combination.
The aforementioned warrants and options
are deemed to be effective on February 6, 2018, the date of the consummation of its initial business combination with China Sunlong,
as the Company was deemed to be the accounting acquiree in the transaction and the transaction was treated as a recapitalization
of China Sunlong.
The summary of warrant activity is as follows:
|
|
|
|
|
Exercisable
Into
|
|
|
Weighted
Average
|
|
|
Average
Remaining
|
|
|
|
Warrants
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
December 31, 2019
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
3.14
|
|
Granted/Acquired
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
September 30, 2020
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
2.38
|
|
The summary of option activity is as follows:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
December 31, 2019
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
4.16
|
|
Granted/Acquired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
September 30, 2020
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
2.38
|
|
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 Rong Hai. The Company’s consolidated
results of operations and consolidated financial position from continuing operations are almost all attributable to Rong Hai;
accordingly, management believes that the consolidated balance sheets and statement of operations provide the relevant information
to assess Rong Hai’s performance.
The following represents assets by division
as of:
Total assets as of
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Rong Hai and Tongrong WFOE
|
|
$
|
18,750,615
|
|
|
$
|
17,407,872
|
|
Wuge
|
|
|
2,713,358
|
|
|
|
-
|
|
CCNC, Citi Profit BVI and TMSR HK
|
|
|
7,499,788
|
|
|
|
71,521
|
|
Total Assets
|
|
$
|
28,963,761
|
|
|
$
|
17,479,393
|
|
Note 18 – Discontinued Operations
The following depicts the financial position
for the discounted operations of Wuhan Host, Shengrong WOFE, Shengrong HK and China Sunlong as of September 30, 2020 and December
31, 2019, and the result of operations for the discounted operations of Wuhan Host, Shengrong WOFE, Shengrong HK and China Sunlong
for the nine months ended September 30, 2020 and 2019.
|
|
September 30,
|
|
|
December 31,
|
|
Financial Position
|
|
2020
|
|
|
2019
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
-
|
|
|
|
1,544,177
|
|
Total current assets
|
|
|
-
|
|
|
|
1,544,177
|
|
|
|
|
|
|
|
|
|
|
PLANT AND EQUIPMENT, NET
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
3,424,390
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
-
|
|
Deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
Total other assets
|
|
|
-
|
|
|
|
3,424,390
|
|
Total assets
|
|
|
-
|
|
|
|
4,968,567
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
-
|
|
|
|
2,288,195
|
|
Other payables and accrued liabilities
|
|
|
-
|
|
|
|
1,332,430
|
|
Other payables - related parties
|
|
|
-
|
|
|
|
3,108,908
|
|
Customer deposits
|
|
|
-
|
|
|
|
3,019,264
|
|
Lease liabilities - current
|
|
|
-
|
|
|
|
98,582
|
|
Taxes payable
|
|
|
-
|
|
|
|
326,687
|
|
Total current liabilities
|
|
|
-
|
|
|
|
10,174,066
|
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
Third party loan - noncurrent
|
|
|
-
|
|
|
|
143,345
|
|
Lease liabilities - noncurrent
|
|
|
-
|
|
|
|
95,752
|
|
Total other liabilities
|
|
|
-
|
|
|
|
239,097
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
-
|
|
|
|
10,413,163
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
-
|
|
|
|
(5,444,596
|
)
|
Results of Operations
|
|
For the nine months
ended
September
30,
2020
|
|
|
For the
nine months
ended
September
30,
2019
|
|
REVENUES
|
|
|
|
|
|
|
Equipment and systems
|
|
$
|
-
|
|
|
$
|
3,640,256
|
|
Coating and fuel materials
|
|
|
-
|
|
|
|
6,457,240
|
|
Trading and others
|
|
|
-
|
|
|
|
-
|
|
TOTAL REVENUES
|
|
|
-
|
|
|
|
10,097,496
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
Equipment and systems
|
|
|
-
|
|
|
|
1,372,283
|
|
Coating and fuel materials
|
|
|
-
|
|
|
|
5,565,153
|
|
Trading and others
|
|
|
-
|
|
|
|
-
|
|
TOTAL COST OF REVENUES
|
|
|
-
|
|
|
|
6,937,436
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
-
|
|
|
|
3,160,060
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES (INCOME)
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
1,317,909
|
|
Provision for (recovery of) doubtful accounts
|
|
|
(498,332
|
)
|
|
|
-
|
|
TOTAL OPERATING EXPENSES
|
|
|
(498,332
|
)
|
|
|
1,317,909
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
498,332
|
|
|
|
1,842,151
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
1,565
|
|
Other income (expense), net
|
|
|
-
|
|
|
|
49,694
|
|
Total other income (expense), net
|
|
|
-
|
|
|
|
(37,957
|
)
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
498,332
|
|
|
|
1,855,453
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
-
|
|
|
|
297,685
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
498,332
|
|
|
$
|
1,557,768
|
|
Note 19 – Subsequent events
On October 29, 2020, Mr. Yuguo Zhang tendered his resignation
as the President of Code Chain New Continent Limited (the “Company”), effective October 29, 2020. The resignation
of Mr. Zhang has been approved by the Nominating and Corporate Governance Committee and the Board of Directors of the Company.
Mr. Zhang’s resignation was not a result of any disagreement with the Company’s operations, policies or procedures.
On the same day, Mr. Xiaonian Zhang tendered his registration
the Vice President of the Company, effective October 29, 2020. The resignation of Mr. Zhang has been approved by the Nominating
and Corporate Governance Committee and the Board of Directors of the Company. Mr. Zhang’s resignation was not a result of
any disagreement with the Company’s operations, policies or procedures.
On October 29, 2020, approved by the Board of Directors and
the Nominating and Corporate Governance Committee, Mr. Wei Xu, the Co-Chair of the Board of Directors, was appointed as the President
of the Company, effective October 29, 2020.