GD CULTURE GROUP LIMITED The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Report. All monetary figures are presented inU.S. dollars, unless otherwise indicated.
Our Management's Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might be detailed from time to time in our filings with theSecurities and Exchange Commission . Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects. OverviewCode Chain New Continent Limited (formerly known asTMSR Holding Company Limited andJM Global Holding Company , the "Company" or "CCNC"), through its subsidiaries and controlled entities, focuses its business in two segments: (1) coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap; and (2) the research, development and application of Internet of Things (IoT) and electronic tokens. The Company's coal and coke wholesale business is carried out byJiangsu Rong Hai Electric Power Fuel Co., Ltd. ("Rong Hai"), an entity contractually controlled by the Company. The Company's IoT business is carried outWuge Network Games Co., Ltd. ("Wuge"), an entity contractually controlled by the Company. OnJune 30, 2020 , the Company entered into a share purchase agreement withJiazhen Li , former CEO of the Company (the "Buyer"), Long Liao andChunyong Zheng , who are former shareholders of Wuhan HOST, to sell all the equity interest the Company held inChina Sunlong. Shengrong WFOE and Wuhan HOST are indirect subsidiaries of China Sunlong. As a result, as ofJune 30, 2020 , operations of Shengrong WFOE and Wuhan HOST have been designated as discontinued operations. 44
Key Factors that Affect Operating Results
Our operating subsidiaries are incorporated, and our operations and assets are primarily located, inChina . Accordingly, our results of operations, financial condition and prospects are affected byChina's economic and regulation conditions in the following factors: (a) an economic downturn inChina or any regional market inChina ; (b) economic policies and initiatives undertaken by the Chinese government; (c) changes in the Chinese or regional business or regulatory environment affecting our customers; and (e) Changes in the Chinese government policy on industrial solid waste. Unfavorable changes could affect demand for services that we provide and could materially and adversely affect the results of operations. Although the Company has generally benefited fromChina's economic growth and the policies to encourage the improvement of reducing of solid waste discharge, the Company is also affected by the complexity, uncertainties and changes in the Chinese economic conditions and regulations governing the mining industry. Our fuel materials, mainly coal, operations are largely affected by the following aspects. First, the PRC's macroeconomic growth is not as fast as expected; the slowdown of economic growth will affect the demand of the market, and the reduction of coal consumption by enterprises will affect the sales of coal and directly affect our earnings. Second, the coal market price fluctuation will also affect our sales revenue; because Jiangsu Rong Hai has long-term and stable customers, the price fluctuations will affect the cost of purchasing coal and thus affect our revenue. Third, the risk of price fluctuation in the shipping industry. The fluctuation of shipping price will also directly affect the fluctuation of coal market price, thus affecting our income. Fourth, we have long-term and stable customers and continues to rely on a small number of customers from 2009 to 2019. Losing our major customers will have a significant impact on our results of operations. In addition, the payment situation of these customers will be affected by abnormal market changes, which will have a negative impact on our business recovery accounts and cash flow. As a result of the novel coronavirus (COVID-19) outbreak, we have seen a slowdown in revenue growth in first quarter 2020 as our businesses have been negatively impacted by the COVID-19. These impacts of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following: ? We temporally closed our offices and production facilities to adhere to the policy beginning inFebruary 2020 , as required by relevant PRC regulatory authorities. Our offices are slowly reopening
pursuant to
local guidelines.
? Our customers could potentially be negatively impacted by the outbreak,
which may reduce the demand of our products. As a result, our revenue
and income may be negatively impacted in 2020.
? The situation may worsen if the COVID-19 outbreak continues. We will
continue to closely monitor our collections throughout 2020.
Because of the significant uncertainties surrounding the COVID-19 outbreak, the
extent of the continued business disruption and the related financial impact
cannot be reasonably estimated at this time.
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Results of Operations
Year Ended December 31, 2020 as Compared to the Year Ended December 31, 2019
Percentage
2020 2019 Change ChangeRevenues - Equipment and systems $ - $ - $ - - Revenues - Fuel materials 11,261,428 18,955,988 (7,694,560 ) (40.6 )% Revenues - Trading and others 591,455 628,489 (37,034 ) (5.9 )% Total revenues 11,852,883 19,584,477 (7,731,594 ) (39.5 )% Cost of Revenues - Equipment and systems - - - - Cost of Revenues - Fuel materials 10,748,354 18,699,429 (7,951,075 ) (42.5 )% Cost of Revenues - Trading and others - 322,813 (322,813 ) (100.0 )% Total cost of revenues 10,748,354 19,022,242
(8,273,888 ) (43.5 )%
Gross profit 1,104,529 562,235 542,294 96.5 %
Operating expenses 2,057,786 851,638 1,206,148 141.6 %
Loss from operations (953,257 ) (289,403 ) (663,854 ) 229.4 %Other income (expense), net (3,895,433 ) 3,920 (3,899,353 ) (99473.3 )% Loss from continuing operations (4,788,175 ) (414,283 ) (477,074 ) 1055.8 % Discontinued operations: Income (loss) from discontinued operations, net of taxes 505,061 (16,412,060 ) 16,917,121 103.1 % Gain on disposal, net of taxes 6,793,570 -
6,793,570 100.0 %
(Loss) net income 2,510,456 (16,826,343 ) 23,233,617 114.9 %
Revenues
The Company's revenue consists of fuel materials revenue and others revenue.
Total revenues decreased by approximately $7.7 million , or approximately 39.5%,
to approximately $11.9 million for the year ended December 31, 2020 , compared to
approximately $19.6 million for the year ended December 31, 2019 .
Fuel Revenue
Our fuel revenues decreased by approximately $7.7 million , or 40.6%, to
approximately $11.3 million for the year ended December 31, 2020 as compared to
approximately $19.0 million for the year ended December 31, 2019 . The decrease
was mainly due to the reduced sales of Ronghai influenced by COVID-19.
Others Revenue
Our other revenues decreased by approximately $37,000 , or 5.9%, to approximately
$590,000 for the year ended December 31, 2020 as compared to approximately
$630,000 for the year ended December 31, 2019 . The decrease was mainly due to
decreased harbor cargo handling revenue of Rong Hai.
Cost of Revenues
The Company's cost of revenues consists of cost of fuel materials, and cost of others. Total cost of revenues decreased by approximately$8.3 million , or approximately 43.5% to approximately$10.7 million for the year endedDecember 31, 2020 , compared to approximately$19.0 million for the same period in 2019. Our total cost of revenues decrease was attributable to the Company's general decrease in revenue for fuel materials. Gross Profit
The Company's gross profit increased by approximately
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Operating Expenses
The Company's operating expenses include selling, general and administrative ("SG&A") expenses, and recovery of doubtful accounts.
SG & A expenses increased by approximately$0.6 million , by approximately 47.6%, from approximately$1.2 million for the year endedDecember 31, 2019 to approximately$1.7 million for the year endedDecember 31, 2020 . The slight increase was due to slight increases in general and administrative expenses from the Company's investment in professional staff as part of the general expense of maintaining as public company. Loss from Operations As a result of the foregoing, loss from operations for the year endedDecember 31, 2020 was approximately$1.0 million , a increase of approximately$0.7 million , or approximately 229.4%, from approximately$0.3 million for the year endedDecember 31, 2019 . The increase of loss was a result of increase in selling, general and administrative expenses. Net Income The Company's net income increased by approximately$19.3 million , or 114.9%, to approximately$2.5 million net income for the year endedDecember 31, 2020 , from approximately$16.8 million net loss for the same period in 2019. The increase was mainly due to the disposal of some subsidiaries.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.
Cash and cash equivalents
The Company considers certain short-term, highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. Cash and cash equivalents primarily represent bank deposits and fixed deposits with maturities of less than three months.
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Investments
The Company purchases certain liquid short term investments such as money market
funds and or other short term debt securities marketed by financial
institutions. These investments are not insured against loss of principal. These
investments are accounted for as financial instruments that are marked to fair
market value at the end of each reporting period. As result of their short
maturities, and limited risk profile, at times, their amortized carrying cost
may be the best approximation their fair value and used for such investments
Accounts receivable, net
Accounts receivable include trade accounts due from customers. An allowance for doubtful accounts may be established and recorded based on management's assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. Inventories Inventories are comprised of raw materials and work in progress and are stated at the lower of cost or net realizable value using the 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 records a reserve against the inventory when the carrying value exceeds net realizable value. Prepayments Prepayments are funds deposited or advanced to outside vendors for future inventory purchases. As a standard practice inChina , 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. Fair value measurement The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by us. The Company considers the carrying amount of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities, customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature. 48
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
? Level 1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
? Level 2 inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly,
for substantially the full term of the financial instruments.
? Level 3 inputs to the valuation methodology are unobservable and
significant to the fair value.
Financial instruments included in current assets and current liabilities are
reported in the consolidated balance sheets at face value or cost, which
approximate fair value because of the short period of time between the
origination of such instruments and their expected realization and their current
market rates of interest.
Revenue recognition
OnJanuary 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 ofJanuary 1, 2018 . This did not result in an adjustment to retained earnings upon adoption of this new guidance as the Company's revenue, other than warranty revenues, was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the Company's warranty revenue was not material as of the date of adoption, and as a result, did not result in an adjustment. The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company's revenue streams are primarily recognized at a point in time except for the warranty revenues where the warranty periods are recognized over the warranty period, usually is a
period of twelve months.
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The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition except its warranty revenues. An entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but does not control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is entitled to retain in the exchange. 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 toJanuary 1, 2018 , the Company allowed its customers to retain 5% to 10% of the contract price as retainage during the warranty period of 12 months to guarantee product quality. Retainage is considered as a payment term included as a part of the contract price, and was recognized as revenue upon the shipment of products. Due to nature of the retainage, the Company's policy is to record revenue the full value of the contract without VAT, including any retainage, since the Company has experienced insignificant warranty claims historically. Due to the infrequent and insignificant amount of warranty claims, the ability to collect retainage was reasonably assured and was recognized at the time of shipment. OnJanuary 1, 2018 , upon the adoption of ASU 2014-09 (ASC 606), revenues from product warranty are recognized over the warranty period over
12 months.
Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
Gross versus Net Revenue Reporting
Starting fromJuly 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. 50
Recently Issue Accounting Pronouncements
InFebruary 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 afterDecember 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 theU.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We do not believe the adoption of this ASU would have a material effect on our consolidated financial statements.
We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
Liquidity and Capital Resources
The Company has funded working capital and other capital requirements primarily by equity contributions, loans from shareholders, cash flow from operations, short term bank loans, loans from third parties and cash received fromJM Global Holding Company through the reverse capitalization. Cash is required to repay debts and pay salaries, office expenses, income taxes and other operating expenses. As ofDecember 31, 2020 , our net working capital deficit was approximately$8.8 million , over 15% of the Company's current liabilities was from other payables - related parties due to major shareholders. Removing these liabilities, the Company had net working capital of$9.3 million and is expected to continuing generate cash flow from operations in the twelve months period. We believe that current levels of cash and cash flows from operations will be sufficient to meet its anticipated cash needs for at least the next twelve months from the date the consolidated financial statements to be issued. However, it may need additional cash resources in the future if it experiences changed business conditions or other developments, and may also need additional cash resources in the future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed the Company's amounts of cash and cash equivalents on hand, the Company may seek to issue debt or equity securities or obtain additional credit facility. 51
The following summarizes the key components of the Company's cash flows for the
year ended
For the year ended
December 31,
2020 2019
Net cash (used in) provided by operating activities
(4,530,808 ) -
Net cash provided by by financing activities 3,059,195
2,476,605
Effect of exchange rate change on cash (11,136 )
64,945 Net change in cash$ (1,484,850 ) $ 3,301,007 As ofDecember 31, 2020 and 2019, the Company had cash in the amount of$998,717 and$4,027,744 , respectively. As ofDecember 31, 2020 , approximately$998,717 and approximately$0 were held by the Company's subsidiaries in the PRC andHong Kong , respectively. As ofDecember 31, 2019 , approximately$4,03,000 and approximately$354 were held by the Company's subsidiaries in the PRC andHong Kong , respectively. Operating activities
Net cash used in operating activities was approximately$2,101 for the year endedDecember 31, 2020 , as compared to approximately$0.8 million net cash provided by operating activities for the year endedDecember 31, 2019 . Net cash used in operating activities was mainly due to increase of$3.9 million inGoodwill impairments, decrease of$1.2 million in accounts receivables, increase of$0.7 million in other receivables, increase of$0.4 million in prepayments, increase of$0.6 million in accounts payable, and the add back of non-cash items including$7.9 million in disposal of the company. Investing activities Net cash used in investing activities was approximately$4.5 million for the year endedDecember 31, 2020 , as compared to approximately$0 net cash used in investing activities for the year endedSeptember 30, 2019 . Net cash used in investing activities for the year endedDecember 31, 2020 was due to approximately$1.1 million spending on purchase of intangible assets and 3.1 million buy financial products. Financing activities Net cash provided by financing activities was approximately$3.1 million for the year endedDecember 31, 2020 , as compared to approximately$2.5 million net cash used in financing activities for the year endedDecember 31, 2019 . Net cash provided by financing activities for the year endedDecember 31, 2020 was due to approximately$0.4 million proceeds from short-term loans - bank and$2.6 million proceeds from issuance of common stock. Risks Credit Risk
Credit risk is one of the most significant risks for the Company's business.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and accounts receivable.
Cash held at major financial institutions located in the PRC are not insured by
the government. While we believe that these financial institutions are of high
credit quality, it also continually monitors their credit worthiness.
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Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company normally require prepayment from the customers prior to begin production or delivery products. The Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management. In measuring the credit risk of our sales to our customers, the Company mainly reflects the "probability of default" by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development. Liquidity Risk The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage. Inflation Risk
The Company is also exposed to inflation risk Inflationary factors, such as increases in raw material and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the selling prices of our products do not increase with such increased costs. Foreign Currency Risk
A majority of the Company's operating activities and a significant portion of the Company's assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through thePeoples' Bank of China ("PBOC") or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers' invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.
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