Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
No ☒
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒
No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒
No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark
whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
As of June 30, 2020,
the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the
common stock outstanding held by non-affiliates of the registrant, computed by reference to the closing sales price for the common
stock of $1.88, as reported on the Nasdaq Capital Market, was approximately $33 million.
As of March 25, 2021,
there were 36,342,692 shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding.
This Annual Report
contains statements that may be deemed to be “forward-looking statements” within the meaning of the federal securities
laws. These statements relate to anticipated future events, future results of operations and or future financial performance.
In some cases, you can identify forward-looking statements by their use of terminology such as “anticipate,” “believe,”
“could,” “estimate,” “expect,” “future,” “intend,” “may,”
“ought to,” “plan,” “possible,” “potentially,” “predicts,” “project,”
“should,” “will,” “would,” negatives of such terms or other similar terms. These forward-looking
statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking
statements. The forward-looking statements in this Annual Report include, without limitation, statements relating to:
The preceding list
is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements reflect our current
views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those described
in Item 1A “Risk Factors.”
You should not unduly
rely on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected
in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update
publicly any forward-looking statements for any reason after the date of this Annual Report, to conform these statements to actual
results or to changes in our expectations.
PART I
Item 1. Business
General
Code Chain New Continent
Limited (formerly known as JM Global Holding Company and TMSR Holding Company Limited), focuses its business on two segments:
(1) coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap, through Jiangsu Rong
Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), an entity contractually controlled by the Company; and (2)
mobile game development, Internet of Things (IoT), and electronic tokens, through Sichuan Wuge Network Games Co., Ltd. (“Wuge”),
an entity contractually controlled by the Company.
Rong Hai was
established in 2009. For the last ten years, Rong Hai maintained its marketing position by cultivating an experienced
management team equipped with industrial know-how and well-rounded coal sales team. As a veteran in the Chinese coal trading
industry, Rong Hai has a sales team with lengthy experience in coal trading, deep understanding of the market, coal products
tailored to its customers’ demand. Currently, Rong Hai mainly focuses on the sales, storage, transportation, and
processing of steam coal. Because of its proximity to Rugao Port, a port known for its busy coal trade, Rong Hai is able to
keep its transportation cost low and allocate its capital to develop a strong coal processing capacity with processing
equipment and professional personnel. The principal product of Rong Hai is steam coal.
Rong Hai has a
reliable channel of procuring steam coal, large warehouse space for storage, and loyal customers. One of its major customers
is Nantong Linan Industrial Trading Co., ltd., a local manufacturing heavyweight. Since its inception, Rong Hai has
accumulated a growing reputation in the coal industry. In 2016, Rong Hai was awarded “Nantong City most
reputable company in the coal industry” by Nantong Coal Industry Association.
Wuge was established in 2019 and is still
in this early developing stage. 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. It is based on real cities and uses the IoT Grid as the access
point to access e-commerce by Code Chain. Through the game, players can 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. Code Chain access to e-commerce includes Online to Offline
(O2O) “scanning QR Code” and social media that seamlessly link offline and online and connect real and virtual directly,
so that each IoT Grid becomes an e-commerce access to realize the decentralization of e-commerce access and complete the basic
layout for blockchain e-commerce.
In addition, Wuge generates electronic
tokens that combine the five-W elements (when, where, who, why, what), geographic location via the Beidou satellite system and
identity information using Code Chain technology. The electronic tokens are unique, tradable, and inheritable digital assets and
cannot be tampered. The electronic tokens are based on and stored in the Code Chain system and can be used to purchase virtual
property based on real estate.
Our principal executive offices are located
at No 119 South Zhaojuesi Road, 2nd Floor, Room 1, Chenghua District, Chengdu, Sichuan, China 610047, and our
telephone number is: +86 028-84112941. Our website is www.ccnctech.com.
Corporate History and Structure
Overview
Code Chain New Continent Limited, 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, the Company consummated the reincorporation. As a result, the Company changed its state of incorporation
from Delaware to Nevada and implemented a 2-for-1 forward stock split of the Company’s common stock.
Effective as of 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. In connection with the name change, effective
as of the opening of trading on May 18, 2020, the Company’s common stock is trading on the Nasdaq Capital Market under the
ticker symbol “CCNC” and the Company’s warrants to purchase one-half of one shares of Common Stock at a price
of $2.88 per half share ($5.75 per whole share) is quoting on the OTC Pink Market under the ticker symbol “CCNCW”.
Business Combination with China Sunlong
On February 6, 2018, China Sunlong Environmental
Technology Inc. (“China Sunlong”) consummated the business combination with JM Global. This transaction is accounted
for as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the shareholders
of China Sunlong owns the majority of the outstanding shares of JM Global immediately following the completion of the transaction
and JM Global’s operations was the operations of China Sunlong following the transaction. Accordingly, China Sunlong was
deemed to be the accounting acquirer in the transaction and the transaction was treated as a recapitalization of China Sunlong.
After the business combination and prior
to May 1, 2018, all of the Company’s business activities were carried out by the wholly owned operating Chinese company,
Hubei Shengrong Environmental Protection Energy-Saving Science and Technology Ltd. (“Hubei Shengrong”).
Disposition of TJComex
On April 2, 2018, the Company disposed
of its subsidiary, TJComex International Group Corporation (“TJComex BVI”), a British Virgin Islands corporation,
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.
Acquisition of Wuhan Host
On May 1, 2018, the Company completed
the acquisition of 100% equity interest in Wuhan Host Coating Materials Co., Ltd. (“Wuhan Host”), a PRC corporation
engaging in the research and development, production and sale of Zinc-rich coating materials. Wuhan Host was the largest manufacturer
of inorganic Zinc-rich resin and one-component epoxy Zinc-rich resin in China with customers including leading enterprises in
various industries such as electricity, metallurgy, machinery, chemicals, bridge and shipping.
Acquisition of Rong Hai
On November 30,
2018, the Company’s indirectly subsidiary, Shengrong Environmental Protection Technology (Wuhan) Co. Ltd.
(“Shengrong WFOE”), a PRC company, entered into VIE agreements with Jiangsu Rong Hai Electric Power Fuel Co.,
Ltd. The VIE agreements were assigned in whole to the Company’s indirectly subsidiary, Tongrong Technology (Jiangsu)
Co., Ltd. (“Tongrong WFOE”), a PRC company, in April 2020, through which Tongrong WFOE has the right to control,
manage and operate Rong Hai in return for a service fee equal to 100% of Rong Hai’s net income. Rong Hai
is a PRC company incorporated in Jiangsu China, engaging in coal wholesales and sales of coke, steels, construction
materials, mechanical equipment and steel scrap.
Disposition of Hubei Shengrong
On December 27, 2018, the Company, disposed
one of its operating subsidiaries, Hubei Shengrong, a PRC company, pursuant to that certain Equity Purchase Agreement by and among
the Company, the Company’s subsidiary Shengrong WFOE, Hubei Shengrong and Hopeway International Enterprises Limited (the
“Hoepway”). Pursuant to the Equity Purchase Agreement, Shengrong WFOE sold 100% equity interests in Hubei Shengrong
to Hopeway to irrevocably forfeit and cancel all the shares owned by Hopeway.
Acquisition of Wuge
On January 3, 2020, the Company’s
indirectly subsidiary, Tongrong WFOE, entered into VIE agreements with Sichuan Wuge Network Games Co., Ltd. (“Wuge”),
a PRC company. The VIE agreements were assigned in whole to the Company’s indirectly subsidiary, Makesi Iot Technology (Shanghai)
Co., Ltd. (“Makesi WFOE”), a PRC company, in January 2021, through which Makesi WFOE has the right to control, manage
and operate Wuge in return for a service fee equal to 100% of Wuge’s net income.
Disposition of China Sunlong
On June 30, 2020, the Company disposed
China Sunlong and its subsidiaries, including Shengrong Environmental Protection Holding Company Limited (“Shengrong BVI”),
a British Virgin Islands company, Hong Kong Shengrong Environmental Company Limited (“Sunrong HK”), a Hong Kong company,
Shengrong WFOE, and Wuhan Host pursuant to a share purchase agreement with Jiazhen Li, a former Chief Executive Officer of the
Company, and Long Liao and Chunyong Zheng, former shareholders of Wuhan Host. Pursuant to the share purchase agreement, the Company
sold 100% equity interests in China Sunlong to Jiazhen Li in exchange for forfeition and cancellation of all 1,012,932 shares
of common stock of the Company held by Long Liao and Chunyong Zheng. The Company sold its equity interest in China Sunlong due
to the economic disruption in China’s Hubei Province as a result of the COVID-19 pandemic, where Shengrong Environmental
Protection Technology (Wuhan) Limited and Wuhan Host Coating Materials, Limited, indirect subsidiaries of China Sunlong, are located.
Coronavirus
(COVID-19) Update
Recently, there is
an ongoing outbreak of a novel strain of coronavirus (COVID-19) first identified in China and has since spread rapidly globally.
The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities globally
for the past few months. In March 2020, the World Health Organization declared the COVID-19 as a pandemic. Given the rapidly expanding
nature of the COVID-19 pandemic, and because substantially all of our business operations and our workforce are concentrated in
China, we believe there is a risk that our business, results of operations, and financial condition will be adversely affected,
especially for our export related business. Potential impact to our results of operations will also depend on future developments
and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities
and other entities to contain the COVID-19 or mitigate its impact, almost all of which are beyond our control.
The impacts of COVID-19
on our business, financial condition, and results of operations include, but are not limited to, the following:
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We temporally closed our
offices and production facilities to adhere to the policy beginning in February 2020, as required by relevant PRC regulatory authorities.
Our offices are slowly reopening pursuant to local guidelines.
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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.
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The situation may worsen
if the COVID-19 outbreak continues. We will continue to closely monitor our collections throughout 2020.
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Because of the uncertainty
surrounding the COVID-19 outbreak, the business disruption and the related financial impact related to the outbreak of and response
to the coronavirus cannot be reasonably estimated at this time. For a detailed description of the risks associated with the novel
coronavirus, see “Risk Factors—Risks Related to Our Business—Our business could be materially harmed by the
ongoing coronavirus (COVID-19) pandemic.”
Corporate Structure
The following is an organizational chart
setting forth our corporate structure as of the date of this Annual Report.
Contractual Arrangements between Rong
Hai And Tongrong WFOE
Consulting Services
Agreement. Pursuant to the consulting services agreement between Rong Hai and Shengrong WFOE dated November 30, 2018 and
the assignment agreement between Shenrong WFOE and Tongrong WFOE dated April 30, 2020, Tonrong 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. Tonrong WFOE exclusively owns any intellectual property rights
arising from the performance of this agreement. Tonrong WFOE has the right to determine the service fees based on Rong Hai’s
actual operation on a quarterly basis.
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 assignment
agreement between Shenrong WFOE and Tongrong WFOE dated April 30, 2020, the shareholders pledged all of their equity interests
in Rong Hai to Tonrong 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, Tonrong WFOE,
as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests.
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
assignment agreement between Shenrong 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, Tonrong WFOE or its designee has the right to acquire any and all of its assets of Rong Hai.
Without Tonrong 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.
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 assignment agreement between Shenrong WFOE and Tongrong WFOE dated April 30, 2020, each shareholder of Rong Hai irrevocably
appointed Tonrong 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.
Operating Agreement.
Pursuant to the operating agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018 and
the assignment agreement between Shenrong 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 Tonrong 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 Tonrong 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 Tonrong WFOE first if any guarantee is needed for Rong Hai’s performance of any
contract or loan in the course of its business operation.
Contractual Arrangements between Wuge
And Makesi WFOE
Technical Consultation
and Services Agreement. Pursuant to the technical consultation and services agreement between Wuge and Tongrong
WFOE dated January 3, 2020 and the assignment agreement between Tonrong WFOE and Makesi WFOE dated January 11, 2021, Makesi 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. Makesi WFOE exclusively owns any intellectual
property rights arising from the performance of this agreement. Makesi 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 and the assignment agreement
between Tonrong WFOE and Makesi WFOE dated January 11, 2021, Wuge Shareholders pledged all of their equity interests in Wuge to
Makesi 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, Makesi
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 and the assignment agreement
between Tonrong WFOE and Makesi WFOE dated January 11, 2021, each of Wuge Shareholders irrevocably granted to Makesi 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, Makesi 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 Makesi WFOE,
Wuge and Wuge Shareholders dated January 3, 2020 and the assignment agreement between Tonrong WFOE and Makesi WFOE dated January
11, 2021, each Wuge Shareholder irrevocably appointed Makesi 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 Makesi WFOE unilaterally by prior written notice
to the other parties.
Industry Overview
Chinese Coal Trading Market
Global coal is still
the main energy source. According to the International Energy Agency’s Global Coal Market Report (2018-2103) on February
25, 2019, global demand for coal will remain stable in the next five years. China will remain the world’s biggest consumer
of coal. In particular, the clean and efficient development of China's coal industry, as well as the strengthening of nitrogen
oxides, sulfur dioxide and soot emission control, has made coal once again a very attractive energy source. In addition, due to
its affordable price, abundant reserves and convenient transportation, coal remains the main energy source in many other countries
besides China. Therefore, the coal market in China remains strong.
Our Products and Services
Rong Hai was
established in 2009. For the last ten years, Rong Hai maintained its marketing position by cultivating an experienced management
team equipped with industrial know-how and well-rounded coal sales team. As a veteran in the Chinese coal trading industry, Rong Hai has a sales team with lengthy experience in coal trading, deep understanding of the market, coal products tailored to
its customers’ demand. Currently, Rong Hai mainly focuses on the sales, storage, transportation, and processing of
steam coal. Because of its proximity to Rugao Port, a port known for its busy coal trade, Rong Hai is able to keep its
transportation cost low and allocate its capital to develop a strong coal processing capacity with processing equipment and professional
personnel. The principal product of Rong Hai is steam coal. In the second half of 2019, Rong Hai expects to expand
its business into iron ore trading and refined processing, as well as refined coal and coking coal business.
Rong Hai has
a reliable channel of procuring steam coal, large warehouse space for storage, and loyal customers. One of its major customers
is Nantong Linan Industrial Trading Co., ltd., a local manufacturing heavyweight. Since its inception, Rong Hai has accumulated
a growing reputation in the coal industry. In 2016, Rong Hai was awarded “Nantong City most reputable company in
the coal industry” by Nantong Coal Industry Association.
Wuge was established
in 2019 and is still in this early developing stage. 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. It is based on real cities and uses
the IoT Grid as the access point to access e-commerce by Code Chain. Through the game, players can 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. Code Chain access to e-commerce
includes Online to Offline (O2O) “scanning QR Code” and social media that seamlessly link offline and online and connect
real and virtual directly, so that each IoT Grid becomes an e-commerce access to realize the decentralization of e-commerce access
and complete the basic layout for blockchain e-commerce.
In addition, Wuge
produced electronic tokens that combine the five-W elements (when, where, who, why, what), geographic location via the Beidou
satellite system and identity information using Code Chain technology. The electronic tokens are unique, tradable, and inheritable
digital assets and cannot be tampered. The electronic tokens are based on and stored in the Code Chain system and can be used
to purchase virtual property based on real estate.
Our Customers
For the fiscal year
ended December 31, 2019, 34% of the coal Rong Hai procured and processed were sold directly to Nantong Linan Industry and
Commerce Co., Ltd. for its production of acetate fiber plant.
For the fiscal year
ended December 31, 2020, 99.1% of the coal Rong hai procured and processed were sold directly to Nantong Linan Industry
and Commerce Co., Ltd. for its production of acetate fiber plant.
Wuge is still in this early developing
stage and has not cultivated a stable group of customers. The main source of revenue is service fees under contracts with customers.
Our Suppliers
Rong Hai’s
top five suppliers for the fiscal year ended December 31, 2019 are Shanghai Liye Supply Chain Management Co., Ltd., Jiangsu Shengquan
Mining Co., Ltd., Zhejiang Zhenheng Energy Co., Ltd., Zhejiang Shiyue Energy Co., Ltd., and Xuzhou Shenzhan Trading Co., Ltd.
Rong Hai’s
top five suppliers for the fiscal year ended December 31, 2020 are Jiangsu Xinhuagang Energy Development Co. Ltd., Zhejiang
Zhenheng Energy Co. Ltd., Jiangsu Zhonglin Ganglian Supply Chain Management Co. Ltd., Hunan Xiangzhong Mining Group Co. Ltd.,
and Linsen Logistics Group Co. Ltd.
Wuge relies on one
supplier during the fiscal year ended December 31, 2019, Xi’an QIkeli Information Technology Co., Ltd.
Wuge relies on one
supplier during the fiscal year ended December 31, 2020, Ali Cloud Computing Co. Ltd.
Production
Rong
Hai
Rong Hai uses
two tiers membrane filtering system to screen the coal of different specifications, and mix different types of raw coals to produce
final coal products. Through our high tech machinery, we manipulate the level of sulfur content, water content, ash content, and
other different properties of coal in order to meet our customers’ requirements.
Wuge
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. It is based on real cities and uses the IoT Grid as the access point to access e-commerce by Code Chain. Through
the game, players can 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. Code Chain access to e-commerce includes Online to Offline (O2O) “scanning QR Code” and social media
that seamlessly link offline and online and connect real and virtual directly, so that each IoT Grid becomes an e-commerce access
to realize the decentralization of e-commerce access and complete the basic layout for blockchain e-commerce.
In addition, Wuge generates
electronic tokens that combine the five-W elements (when, where, who, why, what), geographic location via the Beidou satellite
system and identity information using Code Chain technology. The electronic tokens are unique, tradable, and inheritable digital
assets and cannot be tampered. The electronic tokens are based on and stored in the Code Chain system and can be used to purchase
virtual property based on real estate.
Research and Development and Our Technology
Wuge has a strong
technology development team, consisted of 26 experienced members, that focused on research, improvement and maintenance the existing
and developing games and Code Chain technology.
Copyrights
As of March 25, 2021,
Wuge has been granted one copyright, which is currently registered in China.
Certificate
No.
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Name
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Type
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Registration
No.
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Application Date
(dd-mm-yy)
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Issuance Date
(dd-mm-yy)
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4610189
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Wuhe Mansion Game Software V1.0
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invention
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2019SR1189432
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05/10/2019
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22/11/2019
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Competition
Competition for Rong Hai
The local competition
is fierce. Our principal competitor is Nantong Huagang Materials Trading Co., Ltd. However, as we have strengths in processing,
transportation and reputation, we have been maintaining a favorable position against our competitor and earn loyalty from our
largest customer.
Competition for Wuge
Code Chain technology
and electronic token are at a developing stage in China. There is currently no established competitor in the market in China.
Recent Development
Proposed Reorganization
General
On March 23, 2020,
the Board of Directors and majority stockholders (the “Consenting Stockholders”) holding an aggregate of 15,491,952
shares of Common Stock issued and outstanding as of March 22, 2020 took action by written consent to approve the conversion of
the Company from a Nevada corporation to a Cayman Islands exempted company (the “Conversion”).
On April 1, 2020, the
Board and the Consenting Stockholders took action by written consent to approve an amendment to the Company’s Articles of
Incorporation to change its corporate name to “Code Chain New Continent Limited” (the “Name Change”) and
to change the ticker symbol of the Common Stock and warrants (the “Warrants”) to
purchase one-half of one shares of Common Stock at a price of $2.88 per half share ($5.75 per whole share) to “CCNC”
and “CCNCW”, respectively (the “Symbol Change”).
Following the completion
of the Conversion, we are expected to qualify as a “foreign private issuer” under the rules and regulations of the
SEC and we expect that the reduced reporting obligations associated with being a foreign private issuer will reduce operational,
administrative, legal and accounting costs in the long term. We will remain subject to the mandates of the Sarbanes-Oxley Act,
and, as long as our ordinary shares are listed on the Nasdaq, the governance and disclosure rules of that stock exchange. However,
as a foreign private issuer, we will be exempt from certain rules under the Exchange Act that would otherwise apply if we were
a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. For example:
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we will not be required to provide the same level of disclosure on certain issues, such as executive compensation;
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we will not be required to conduct advisory votes on executive compensation;
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we will be exempt from filing quarterly reports under the Exchange Act with the SEC;
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we will not be subject to the requirement to comply with Regulation FD, which imposes certain restrictions on the selected disclosure of material information;
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we will not be required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
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we will not be required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
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We expect to take advantage
of these exemptions if the Conversion is effected. Accordingly, after the completion of the Conversion, if you hold our securities,
you may receive less information about the Company and our business than you currently receive with respect to the Company and
be afforded less protection under the U.S. federal securities laws than you are entitled to currently. However, consistent with
our policy of seeking input from, and engaging in discussions with, our stockholders, on executive compensation matters, we intend
to provide disclosure relating to its executive compensation philosophy, policies and practices and conduct an advisory vote on
executive compensation once every three years after the Conversion is effected. However, we expect to review this practice after
the next such advisory vote and may at that time or in the future determine to conduct such advisory votes more frequently or to
not conduct them at all.
Additionally, as a
foreign private issuer, we will be permitted to follow corporate governance practices in accordance with Cayman Islands laws in
lieu of certain Nasdaq corporate governance standards, such as the following Nasdaq corporate governance standards requiring that:
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the majority of the board of directors be comprised of independent directors;
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executive compensation be determined by independent directors or a committee of independent directors;
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director nominees be selected, or recommended for selection by the board of directors, by independent directors or a committee of independent directors;
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an audit committee be comprised of at least three members, each of whom is an independent director and one of whom has finance and accounting experience; and
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all related party transactions be reviewed by the audit committee or another independent body of the board of directors.
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Harney Westwood &
Riegels, our Cayman Islands counsel, has advised us that there are no comparable Cayman Islands laws related to the above corporate
governance standards. Notwithstanding the foregoing, we do not intend to initially rely on any Nasdaq exemptions or accommodations
for foreign private issuers following the Conversion.
We believe the Conversion
and the related reorganization will enhance stockholder value. However, we cannot predict what impact, if any, the Conversion and
reorganization will have in the long term in light of the fact that the achievement of our objectives depends on many things, including,
among other things, future laws and regulations, as well as the development of our business.
The Conversion, the
Name Change and Symbol Change are not effective as of the date of this report. For a discussion of the risk factors associated
with the reorganization, please see the section entitled “Item 1A. Risk Factors—Risks Related to the Conversion.”
Effect of the reorganization
By virtue of the Conversion,
all of the rights, privileges and powers of the Company, all property owned by the Company, all debts due to the Company and all
other causes of action belonging to the Company immediately prior to the Conversion will remain vested in the Company following
the Conversion. In addition, by virtue of the Conversion, all debts, liabilities and duties of the Company immediately prior to
the Conversion will remain attached to the Company following the Conversion. The Company will remain as the same entity following
the Conversion, and the Conversion will not effect any change in our business, management or operations or the location of our
principal executive offices.
Upon effectiveness
of the Conversion, all of our issued and outstanding shares of capital stock under Nevada laws will be automatically converted
into issued and outstanding shares of share capital of under Cayman Islands laws, without any action on the part of our stockholders.
The Conversion will
have no effect on the trading of our shares of capital stock. Upon the effectiveness of the Symbol Change, our ordinary shares
are expected to continue listing on Nasdaq Capital market under the new symbol “CCNC”.
Upon effectiveness
of the Conversion, our directors and officers will remain as directors and officers. We believe that the Conversion will not affect
any of our material contracts with any third parties, and that our rights and obligations under such material contractual arrangements
will continue as rights and obligations of the Company incorporated in Cayman Islands.
Procedure for Effecting the Conversion
To accomplish the Conversion,
the Board has adopted a plan of conversion. The Plan of Conversion provides that we will convert into an exempted company limited
by shares in Cayman Islands and will thereafter be subject to all of the provisions of the Companies Law.
Our common stock is
currently listed on the Nasdaq Capital Market and our warrants are quoted on the OTC Pink. Pursuant to Rule 10b-17 of the Securities
Exchange Act of 1934, the Conversion, the Name Change and the Symbol Change will require FINRA’s approval in order for it
to be recognized for trading purposes. Furthermore, the Conversion, the Name Change and the Symbol Change will result in a change
in the CUSIP numbers of our Common Stock (or ordinary share after the conversion) and Warrants. We will provide definitive information
on our FINRA approval and new CUSIP numbers in a Current Report on Form 8-K to be filed with the Securities and Exchange Commission
prior to the effective date of such Conversion, the Name Change and the Symbol Change. In addition, we are required to notify Nasdaq
of the Conversion, the Name Change and the Symbol Change. Specifically, we are required to notify Nasdaq of the Symbol Change no
later than two business days prior to the change, the Conversion as soon as practical after the change, and the Name Change no
later than 10 calendar days after the change.
The Board will cause
the Conversion to be effected as soon as practicable thereafter by filing with the Secretary of State of the State of Nevada articles
of conversion (the “Articles of Conversion”) and applying to the Registrar of Companies in the Cayman Islands to be
registered by way of continuation as an exempted company limited by shares under the Companies Law. In addition, the Company will
adopt the Proposed Articles after the Conversion.
Notwithstanding the
foregoing, the Conversion may be delayed by the Board or the Plan of Conversion may be terminated and abandoned by action of the
Board at any time prior to the effective time of the Conversion, whether before or after approval by our stockholders, if the Board
determines for any reason that such delay or termination would be in the best interests of the Company and our stockholders.
The Conversion will
become effective upon the filing (and acceptance thereof by the Secretary of State of the State of Nevada and the Registrar of
Companies of Cayman Islands, as applicable) of the Articles of Conversion and the date of registration specified in the certificate
issued by the Registrar of Companies in the Cayman Islands confirming registration by way of continuation. The Name Change and
Symbol Change will become effective upon will become effective upon the filing (and acceptance thereof by the Secretary of State
of the State of Nevada and the Registrar of Companies of Cayman Islands, as applicable) of the Certificate of Amendment and approval
by FINRA.
August 2020 Private Placement
See Part II, Item 5(e)
“Recent Sales of Unregistered Securities - August 2020 Private Placement”.
February 2021 Offering
See Part II, Item 5(e) “Recent Sales
of Unregistered Securities - February 2021 Offering”.
Environmental Matters
As of December
31, 2020, Rong Hai and Wuge were not subject to any fines or legal action involving non-compliance with any relevant
environmental regulation, nor are we aware of any threatened or pending action, including by any environmental regulatory
authority.
Governmental Regulations
Business license
Any company that conducts
business in the PRC must have a business license that covers a particular type of work. Our business license covers our present
business of manufacturing, sale and lease of environment protection equipment, development of environment protection technologies
and related technology and consulting services. Prior to expanding our business beyond that of our business license, we are required
to apply and receive approval from the PRC government.
Employment laws
We are subject to
laws and regulations governing our relationship with our employees, including: wage and hour requirements, working and safety
conditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations, which
may require substantial resources for compliance. China’s National Labor Law, which became effective on January 1, 1995,
and amended on August 27, 2009, and China’s National Labor Contract Law, which became effective on January 1, 2008, and
amended on December 28, 2012, permit workers in both state and private enterprises in China to bargain collectively. The National
Labor Law and the National Labor Contract Law provide for collective contracts to be developed through collaboration between the
labor union (or worker representatives in the absence of a union) and management that specify such matters as working conditions,
wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises to sign individual contracts,
which are to be drawn up in accordance with the collective contract.
Intellectual property protection
in China
Patent. The
PRC has domestic laws for the protection of copyrights, patents, trademarks and trade secrets. The PRC is also signatory to some
of the world’s major intellectual property conventions, including:
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Convention establishing
the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
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Paris Convention for the
Protection of Industrial Property (March 19, 1985);
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Patent Cooperation Treaty
(January 1, 1994); and
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The Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
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Patents in the PRC
are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions
of the China Patent Law and its Implementing Regulations came into effect in 1993, 2001 and 2009, respectively.
The PRC is signatory
to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application
for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during
the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers
three kinds of patents — patents for inventions, utility models and designs. The Chinese patent system adopts the principle
of first to file, which means that a patent may be granted only to the person who first files an application. Consistent with
international practice, the PRC allows the patenting of inventions or utility models that possess the characteristics of novelty,
inventiveness and practical applicability only. For a design to be patentable it cannot be identical with, or similar to, any
design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly
used in the country, and should not be in conflict with any prior right of another.
Copyright. Copyright
in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and
regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. Registered
trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with
the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark
which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities
or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable
ten-year period, unless otherwise revoked. The duration of a trademark is 10 years from the date of registration.
Domain names. Domain
name registrations are handled through domain name service agencies established under the relevant regulations, and applicants
become domain name holders upon successful registration.
Regulations on Tax
PRC Corporate Income Tax
The PRC corporate
income tax, or CIT, is calculated based on the taxable income determined under the applicable CIT Law and its implementation rules,
which became effective on January 1, 2008 and amended on February 24, 2017. The CIT Law imposes a uniform corporate income tax
rate of 25% on all resident enterprises in China, including foreign-invested enterprises.
Uncertainties exist
with respect to how the CIT Law applies to the tax residence status of The Company and our offshore subsidiaries. Under the CIT
Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident
enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for corporate income tax purposes.
Although the implementation rules of the CIT Law define “de facto management body” as a managing body that exercises
substantive and overall management and control over the production and business, personnel, accounting books and assets of an
enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State
Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore
incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that
has a PRC enterprise or enterprise group as its primary controlling shareholder. Although the Company does not have a PRC enterprise
or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise
within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we have applied the guidance set
forth in Circular 82 to evaluate the tax residence status of The Company and our subsidiaries organized outside the PRC.
According to Circular
82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de
facto management body” in China and will be subject to PRC corporate income tax on its worldwide income only if all of the
following criteria are met:
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the primary location of
the day-to-day operational management is in the PRC;
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decisions relating to the
enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the
PRC;
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the enterprise’s
primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained
in the PRC; and
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50% or more of voting board
members or senior executives habitually reside in the PRC.
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We do not believe
that we meet any of the conditions outlined in the immediately preceding paragraph.
We believe none of
our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise
is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term
“de facto management body.” As all of our management members are based in China, it remains unclear how the tax residency
rule will apply to our case. If the PRC tax authorities determine that we or any of our subsidiaries outside of China is a PRC
resident enterprise for PRC enterprise income tax purposes, then we or such subsidiary could be subject to PRC tax at a rate of
25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise
income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for
enterprise income tax purposes, gains realized on the sale or other disposition of our ordinary shares may be subject to PRC tax,
at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions
of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of
our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the
event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our ordinary
shares.
Value-Added Tax and Business
Tax
In November 2011,
the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax
to Replace Business Tax. In May and December 2013 and April 2014, the Ministry of Finance and the State Administration of Taxation
promulgated Circular 37, Circular 106 and Circular 43 to further expand the scope of services which are to be subject to Value-Added
Tax, or VAT, instead of business tax. Pursuant to these tax rules, from August 1, 2013, VAT will be imposed to replace the business
tax in certain service industries, including technology services and advertising services, on a nationwide basis. The VAT rate
shall be 17% for sale or importation of goods by a taxpayer. But, unlike business tax, a taxpayer is allowed to offset the qualified
input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided.
Regulations Relating to Foreign Exchange
and Dividend Distribution
Foreign Exchange Regulation
The principal regulations
governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange
regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions,
may be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast,
approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency
is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In November 2012,
SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment.
Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses
accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the
PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no
longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different
provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions
on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013,
which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall
be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the
PRC based on the registration information provided by SAFE and its branches.
We typically do not
need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the
relevant approvals of SAFE and other PRC government authorities as necessary.
SAFE Circular 37
SAFE promulgated the
Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular
commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity,
for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests
in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.”
SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special
purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division
or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the
required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle
may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with
the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange
controls.
We have notified substantial
beneficial owners of ordinary shares who we know are PRC residents of their filing obligation. However, we may not be aware of
the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners
and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular 37. The failure of our beneficial
owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 or
the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth
in SAFE Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register
or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends
or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized
by SAFE.
Share Option Rules
Under the Administration
Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved
in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized
branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies
may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose
companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating
in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012,
PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans
are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary
of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration
and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution
to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers.
We will make efforts to comply with these requirements upon completion of our initial public offering.
Regulation of Dividend
Distribution
The principal laws,
rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC,
as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign Equity Joint Venture
Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends
only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both
PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of
their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is
not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior
fiscal years may be distributed together with distributable profits from the current fiscal year.
Legal Proceedings
From time to time,
we may be involved in various claims and legal proceedings arising in the ordinary course of business. None of our operating subsidiaries
or variable interest entities is currently a party to any such claims or proceedings which, if decided adversely to the Company,
would either, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of
operations or cash flows.
Employees
As of March 24, 2021,
Wuge, Rong Hai had 36 and 18, respectively, full-time employees.
We have not experienced
any significant labor disputes and consider our relationship with our employees to be good. Our employees are not covered by any
collective bargaining agreement.
As we continue to
expand our business, we believe it is critical to hire and retain top talent, especially in the areas of marketing and technology
engineering. We believe we have the ability to attract and retain high quality engineering talent in China based on our competitive
salaries, annual performance-based bonus system, and equity incentive program for senior employees and executives. In addition,
we have a training program for entry-level engineers that allows them to work closely with an experienced mentor to gain valuable
hands-on experience and provide other professional development opportunities, including seminars where experienced engineers give
lectures on specific engineering topics and new methods that can be applied to various projects.
Item 1A. Risk Factors
An investment in
our shares of common stock involves a high degree of risk. You should carefully consider the following risk factors, together
with the other information contained in this annual report, before you decide to buy any shares. Any of the following risks could
cause our business, results of operations and financial condition to suffer materially, causing the market price of our shares
of common stock to decline, in which event you may lose part or all of your investment in our shares of common stock. Additional
risks and uncertainties not currently known to us or that we currently do not deem material may also become important factors
that may materially and adversely affect our business.
Risks Related to Our Business and Operations
Our business, results of operations
and financial condition have been and may be further adversely affected by global public health epidemics, including the strain
of coronavirus known as COVID-19.
In December 2019, a novel strain of coronavirus
causing respiratory illness (“COVID-19”) surfaced in Wuhan, China, spreading at a fast rate in January and February
of 2020, and confirmed cases were also reported in other parts of the world. In reaction to this outbreak, an increasing number
of countries imposed travel suspensions to and from China following the World Health Organization’s “public health
emergency of international concern” announcement on January 30, 2020. Since this outbreak, business activities in China
and many other countries including U.S. have been disrupted by a series of emergency quarantine measures taken by the government.
As a result, our operations in China and
U.S. have been materially affected. Our office in Hubei Province, China were closed since the lockdown was enforced on January
23, 2020. The economic disruption caused by COVID-19 were catastrophic for our waste management business in Wuhan, which had no
revenue and negative operating income since the fourth quarter of 2019 and no revenue or operating income for the first and second
quarter of 2020. We lost employees, suppliers and customers and were not been able to recover. As a result, we sold our businesses
located in Wuhan. See “Our Company – Corporate History – Disposition of China Sunlong”. Our offices in
Jiangsu Province and Sichuan Province in China were temporarily closed from early February until early March 2020. We have seen
a slowdown in revenue growth in first three quarters of 2020.
The extent to which COVID-19 negatively
impacts our business is highly uncertain and cannot be accurately predicted. We believe that the coronavirus outbreak and the
measures taken to control it may have a significant negative impact on not only our business, but economic activities globally.
The magnitude of this negative effect on the continuity of our business operation in China and in the U.S. remains uncertain.
These uncertainties impede our ability to conduct our daily operations and could materially and adversely affect our business,
financial condition and results of operations, and as a result could adversely affect our stock price and create more volatility.
Our operating companies, Rong Hai and Wuge, both contractually controlled by the Company, have limited operating histories, which make it difficult to evaluate
their businesses and prospects.
Rong Hai began operating in May
2009 and has a limited operating history. Rong Hai generated $18.31 million in revenue in 2017, $17.47 million in revenue
in 2018, $19.58 million in 2019 and $11.3 million in 2020. But the past revenue might not be indicative of future performance.
Similarly, Wuge commenced operation in October 2019 and is in the development stage. Wuge has generated about $591,455 in revenue
in 2020. We cannot guarantee whether Wuge will continue to generate revenue. You should consider our future prospects in light
of the risks and uncertainties experienced by early stage companies in evolving industries, such as the coal products and alternative
energy industries and the Internet of Things industry in China. Rong Hai’s and Wuge’s limited history may not
serve as an adequate basis to judge our future prospects and results of operations. Our operations are subject to all of the risks,
challenges, complications and delays frequently encountered in connection with the operation of any new business, as well as those
risks that are specific to the coal trading industry. Investors should evaluate us in light of the problems and uncertainties
frequently encountered by companies attempting to develop markets for new products and technologies. Despite our best efforts,
we may never overcome these obstacles.
We will continue to encounter risks and
difficulties that companies at a similar stage of development frequently experience, including the potential failure to:
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obtain sufficient working
capital and increase its registered capital to support expansion of our industrial and mining recycling business;
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comply with any changes
in the laws and regulations of the PRC or local province that may affect our operations;
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expand our customer base;
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maintain adequate control
of default risks and expenses allowing us to realize anticipated revenue growth;
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implement our growth strategies
and plans and adapt and modify them as needed;
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integrate any future business
combinations; and
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anticipate and adapt to
changing conditions in the Chinese industrial and mining recycling industry resulting from changes in government regulations,
mergers and Business Combinations involving our competitors, and other significant competitive and market dynamics.
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If we are unable to address any or all
of the foregoing risks, our business may be materially and adversely affected.
Our revenues are highly dependent on
a small number of customers, and we will likely continue to be dependent on a small number of customers.
Three of Company’s
customers accounted for 99.1% of our total revenues for the year ended December 31, 2020. We are, and will likely continue to
be, dependent on a small number of customers, and the loss of any such customer would materially and adversely affect our business,
operating results and financial condition. Furthermore, as a result of our reliance on a limited number of customers, we could
face pricing and other competitive pressures which may have a material adverse effect on our business, operating results and financial
condition.
A significant part of Rong Hai’s revenues is also derived
from a small number of customers. Rong Hai expects a small number of customers will continue to generate a substantial portion
of our revenues for the foreseeable future. As of December 31, 2020, Nantong Linan Industrial Trading Co. Ltd. accounts for 99.1%
of the company’s total sales. The loss of Nantong Linan, or the change of the contractual terms of the contract entered between
Rong Hai and Nantong Linan or any significant dispute with Nantong Linan could materially adversely affect its financial condition
and its results of operations.
If one or more of
Rong Hai’s customers does not perform under one or more contracts with it and Rong Hai is not able to find
a replacement contract, or if a customer exercises certain rights to terminate the contract, Rong Hai could suffer a loss
of revenues that could materially adversely affect its business, financial condition and results of operations.
The coal wholesale industry and
IoT industry are competitive in China and could cause us to lose market share and revenues in the future.
The coal wholesale industry and IoT industry
are very competitive in China, and we expect these industries to become more competitive as it begins to consolidate. Some of
our competitors will likely have substantially greater financial, marketing and other resources than us. As a result, we could
lose market share and our revenues could decline, thereby adversely affecting our earnings and potential for growth. While we
believe that we will be able to successfully compete in this area as a result of our proprietary technology, there is no assurance
that we will be able to hire and retain the necessary employees and compete successfully.
Wuge may be unable to gain any significant
market acceptance for our products and services or be unable to establish a significant market presence.
Wuge’s growth strategy for is substantially
dependent upon our ability to market our intended products and services successfully to prospective clients in China. This requires
that we heavily rely upon our development and marketing partners. Failure to select the right development and marketing partners
will significantly delay or prohibit our ability to develop our intended products and services, market the products and gain market
acceptance. Our intended products and services may not achieve significant market acceptance. If acceptance is achieved, it may
not be sustained for any significant period of time. Failure of our intended products and services to achieve or sustain market
acceptance could have a material adverse effect on our business, financial conditions and the results of our operations.
If potential users within the target
markets do not widely adopt Code Chain technology and IoT services or Wuge fails to achieve and sustain sufficient market acceptance,
we will not generate sufficient revenue, if at all, and our growth prospects, financial condition and results of operations could
be harmed.
Wuge may never gain significant acceptance
in the marketplace and, therefore, may never generate substantial revenue or allow us to achieve or maintain profitability. Widespread
adoption of Code Chain technology and IoT services in China depends on many factors, including acceptance by users that such systems
and methods or other options. Our ability to achieve commercial market acceptance for Wuge or any other future products also depends
on the strength of our sales, marketing and distribution organizations.
Cyber security risks could adversely
affect Wuge’s busines and disrupt its operations.
The threats to network and data security
are increasingly diverse and sophisticated. Despite our efforts and processes to prevent breaches, Wuge’s products devices
and those of third parties that we use in our operations are vulnerable to cyber security risks, including cyber attacks such
as viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic break-ins, employee theft or misuse,
and similar disruptions from unauthorized tampering with our servers and computer systems or those of third parties that we use
in our operations, which could lead to interruptions, delays, loss of critical data, and loss of consumer confidence.
In addition, we may be the target of email
scams that attempt to acquire sensitive information or company assets. Despite our efforts to create security barriers to such
threats, we may not be able to entirely mitigate these risks. Any cyber attack that attempts to obtain our data and assets, disrupt
our service, or otherwise access our systems, or those of third parties we use, if successful, could adversely affect our business,
operating results, and financial condition, be expensive to remedy, and damage our reputation.
An assertion by a third party that
we are infringing its intellectual property could subject us to costly and time-consuming litigation or expensive licenses and
our business could be harmed.
The technology industries involving IoT
devices, software and services are characterized by the existence of a large number of patents, copyrights, trademarks and trade
secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Much
of this litigation involves patent holding companies or other adverse patent owners who have no relevant product revenues of their
own, and against whom our own patent portfolio may provide little or no deterrence.
We cannot assure you that we, our subsidiaries
or our variable interest entities will prevail in any future intellectual property infringement or other litigation given the
complex technical issues and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could
be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays, or require
us or our subsidiaries to enter into royalty or licensing agreements. In addition, we, our subsidiaries or our variable interest
entities could be obligated to indemnify our customers against third parties’ claims of intellectual property infringement
based on our products or solutions. If our products or solutions violate any third-party intellectual property rights, we could
be required to withdraw them from the market, re-develop them or seek to obtain licenses from third parties, which might not be
available on reasonable terms or at all. Any efforts to re-develop our products or solutions, obtain licenses from third parties
on favourable terms or license a substitute technology might not be successful and, in any case, might substantially increase
our costs and harm our business, financial condition and operating results. Withdrawal of any of our products or solutions from
the market could harm our business, financial condition and operating results.
Failure to manage Rong Hai and Wuge effectively since its acquisition could materially impact our business.
The recent acquisition of Rong Hai and Wuge have placed, and future growth will place, a significant strain on the Company’s management, administrative, operational
and financial infrastructure. The Company’s success will depend in part on its ability to manage Rong Hai and Wuge
effectively. To manage the recent and expected growth of its operations and personnel, the Company will need to continue to improve
its operational, financial and management controls and its reporting systems and procedures. Failure to effectively manage Rong Hai and Wuge could result in difficulty or delays in deploying the Company’s services to customers, declines in quality
or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any
of these difficulties could adversely impact the Company’s business performance and results of operations.
Rong Hai’s business
and results of operations are dependent on the PRC coal markets, which may be cyclical.
As its revenue is substantially derived
from the sale of steam coal, Rong Hai’s business and operating results are substantially dependent on the domestic
supply of steam coal. The PRC coal market is cyclical and exhibits fluctuation in supply and demand from year to year and is subject
to numerous factors beyond our control, including, but not limited to, economic conditions in the PRC, global economic conditions,
and fluctuations in industries with high demand for coal, such as the utilities and steel industries. Fluctuations in supply and
demand for coal affects coal prices which, in turn, may have an adverse effect on our operating and financial performance. The
demand for coal is primarily affected by overall economic development and the demand for coal from the electricity generation,
steel and construction industries. The supply of coal, on the other hand, is primarily affected by the geographic location of
the coal supplies, the volume of coal produced by domestic and international coal suppliers, and the quality and price of competing
sources of coal. Alternative fuels such as natural gas and oil, alternative energy sources such as hydroelectric power and nuclear
power, and international shipping costs also impact the market demand for coal. Excess demand for coal may increase coal prices,
which would have an adverse effect on the cost of goods sold which would, in turn, cause a short-term decline in our profitability
if we are unable to increase the price of our steam coal to our customers. Local government may regulate residential winter heating
prices so they are not increased above a certain threshold, thus our residential heating customers may not be able to pay higher
steam coal prices. As a result, Rong Hai may not be able to increase its steam coal price in response to any increase in
coal price or Rong Hai may have to decrease its steam coal price when it renews contracts with its customers. As a result,
Rong Hai may not able to keep its gross margin.
Our results of operations are subject,
to a significant extent, to economic, political and legal developments in the PRC.
All of the sales
of Rong Hai and Wuge were made to customers based in the PRC. We expect that a majority of their sales will continue
to be made to customers based in the PRC. Accordingly, the economic, political and social conditions, as well as government
policies, of the PRC may affect our business. The PRC economy differs from the economies of most developed countries in many
respects, including: (i) structure; (ii) level of government involvement; (iii) level of development; (iv) growth rate; (v)
control of foreign exchange and (vi) allocation of resources. The PRC economy has been transitioning from a planned economy
to a more market-oriented economy. For the past two decades, the PRC government has implemented economic reform measures
emphasizing the utilization of market forces in the development of the PRC economy. Changes in the PRC’s political,
economic and social conditions, laws, regulations and policies could materially and adversely affect our business and results
of operations. In addition, the PRC government indirectly influences coal prices through its regulation of power tariffs and
its control over the allocation of the transportation capacity of the national rail system. Any significant downturn in coal
prices in the PRC could materially and adversely affect our business and results of operations. Additionally, the PRC
government could adopt new policies that could shift demand away from coal to other energy sources. Any significant decline
in demand for, or over-supply of, coal could materially and adversely affect our revenues from coal export sales.
Competition could put downward pressure
on coal prices and, as a result, materially and adversely affect our revenues and profitability.
Rong Hai competes with numerous
other domestic and foreign coal producers for domestic sales. Overcapacity and increased production within the domestic coal industry,
and decelerating steel demand in Asia have at times, and could in the future, materially reduce coal prices and therefore could
materially reduce our revenues and profitability. Potential changes to international trade agreements, trade policies, trade concessions
or other political and economic arrangements may benefit coal producers operating in countries other than China. We may not be
able to compete on the basis of price or other factors with companies that in the future benefit from favorable foreign trade
policies or other arrangements. In addition, our ability to ship our coal to international customers depends on port capacity,
which is limited. Increased competition within the coal industry for international sales could result in us not being able to
obtain throughput capacity at port facilities, or could result in the rates for such throughput capacity increasing to a point
where it is not economically feasible to export our coal.
The domestic coal industry has experienced
consolidation in recent years, including consolidation among some of our major competitors. In addition, substantial overcapacity
exists in the coal industry and several other large coal companies have also filed, and others may file, bankruptcy proceedings
which could enable them to lower their productions costs and thereby reduce the price for their coal, which in turn could adversely
affect our revenues if we are not able to similarly reduce our prices. Consolidation in the coal industry or current or future
bankruptcy proceedings of our coal competitors could adversely affect our competitive position.
In addition to competing with other coal
producers, Rong Hai competes generally with producers of other fuels, such as natural gas. Natural gas pricing has declined
significantly in recent years. The decline in the price of natural gas has caused demand for coal to decrease and adversely affected
the price of our coal. Sustained periods of low natural gas prices have also contributed to utilities phasing out or closing existing
coal-fired power plants and continued low prices could reduce or eliminate construction of any new coal-fired power plants. This
trend has, and could continue to have, a material adverse effect on demand and prices for our coal. Moreover, the construction
of new pipelines and other natural gas distribution channels may increase competition within regional markets and thereby decrease
the demand for and price of our coal.
As a “smaller
reporting company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure
may make our common stock less attractive to investors.
For as long as we remain
an “smaller reporting company” as defined in Rule 405 of the Securities Act of 1933, as amended (the “Securities
Act”) and Item 10 of the Regulation S-K, we will elect to take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not “smaller reporting companies”, including, but not limited
to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and the ability to include only two years
of audited financial statements and only two years of related management’s discussion and analysis of financial condition
and results of operations disclosure. Because of these lessened regulatory requirements, our stockholders would be left without
information or rights available to stockholders of more mature companies. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Risks Related to Our Corporate Structure
The failure to comply with PRC regulations
relating to mergers and acquisition of domestic enterprises by offshore special purpose vehicles may subject the Company to severe
fines or penalties and create other regulatory uncertainties regarding the Company’s corporate structure.
On August 8, 2006,
the Ministry of Commerce (“MOFCOM”), joined by the China Securities Regulatory Commission (“CSRC”), the
State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation (“SAT”),
the State Administration for Industry and Commerce (the “SAIC”), and the State Administration of Foreign Exchange
(“SAFE”), jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006, and as amended on June 22,
2009. This regulation, among other things, has certain provisions that require offshore companies formed for the purpose of acquiring
PRC domestic companies and controlled directly or indirectly by PRC individuals and companies which are the related parties with
the PRC domestic companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval
of the CSRC prior to publicly listing special purpose vehicles’ securities on an overseas stock market. On September 21,
2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted
for obtaining CSRC approval.
The application of
the M&A Rules with respect to the Company’s corporate structure remains unclear, with no current consensus existing among
leading PRC law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and CSRC approvals
under the M&A Rules are not required in the context of the contractual arrangements with Rong Hai and Wuge, our operating entities
in China, because both Tongrong WFOE and Makesi WFOE were incorporated as wholly owned foreign investment enterprise with the approval
of local department of commerce. However, we cannot be certain that the relevant PRC government agencies, including the CSRC and
MOFCOM, would reach the same conclusion, and we cannot be certain that MOFCOM or the CSRC will not deem that the contractual arrangements
circumvent the M&A Rules, and other rules and notices, or that prior MOFCOM or CSRC approval is required for overseas financing.
If the CSRC, MOFCOM,
or another PRC regulatory agency subsequently determines that CSRC, MOFCOM or other approval was required for the contractual arrangement
with Rong Hai and Wuge, our operating entities in China, or if prior CSRC approval for overseas financings is required and not
obtained, the Company may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies.
In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit
payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial
condition, results of operations, reputation and prospects, as well as the trading price of our shares of common stock. The CSRC
or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas
financings, to restructure the Company’s corporate structure, or to seek regulatory approvals that may be difficult or costly
to obtain.
The M&A Rules,
along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government
authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our
future acquisition strategy.
PRC regulations relating to investments
in offshore companies by PRC residents may subject The Company’s PRC-resident beneficial owners or its PRC subsidiaries
to liability or penalties, limit our ability to inject capital into its PRC subsidiaries or limit its PRC subsidiaries’
ability to increase their registered capital or distribute profits.
SAFE promulgated the
Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular
commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity,
for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests
in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.”
SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special
purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division
or other material event. In the event that a PRC resident holding interests in a special purpose vehicle fails to fulfill the
required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle
may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the
various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange
controls.
SAFE promulgated the
Notice of SAFE on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment, or
SAFE Circular 13, on February 13, 2015, which was effective on June 1, 2015. SAFE Circular 13 cancels two administrative approval
items: foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct
investment, instead. Banks shall directly examine and handle foreign exchange registration under domestic direct investment and
foreign exchange registration under overseas direct investment, and SAFE and its branch shall indirectly regulate the foreign
exchange registration of direct investment through banks.
The Company may not be aware of the identities
of all of its beneficial owners who are PRC residents. The Company does not have control over its beneficial owners and cannot
assure you that all of its PRC-resident beneficial owners will comply with SAFE Circular 37, SAFE Circular 13 and subsequent rules
implemented by SAFE. The failure of the Company’s beneficial owners who are PRC residents to register or amend their SAFE
registrations in a timely manner pursuant to SAFE Circular 37, SAFE Circular 13 and subsequent implementation rules, or the failure
of future beneficial owners of the Company who are PRC residents to comply with the registration procedures set forth in SAFE
Circular 37, SAFE Circular 13 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries
to fines and legal sanctions. Furthermore, since SAFE Circular 37 and SAFE Circular 13 was recently promulgated and it is unclear
how such regulations, and any future regulations concerning offshore or cross-border transactions, will be interpreted, amended
and implemented by the relevant PRC government authorities, the Company cannot predict how these regulations will affect its business
operations or future strategy. Failure to register or comply with relevant requirements may also limit the Company’s ability
to contribute additional capital to its PRC subsidiaries and limit its PRC subsidiaries’ ability to distribute dividends
to the Company. These risks may have a material adverse effect on the Company’s business, financial condition and results
of operations.
If Rong Hai or Wuge fails
to maintain the requisite licenses and approvals required under PRC law, our business, financial condition and results of operations
may be materially and adversely affected.
Foreign investment is highly regulated
by the PRC government and local authorities. Rong Hai and Wuge are required to obtain and maintain certain licenses or
approvals from different regulatory authorities in order to operate their respective current businesses. These licenses and approvals
are essential to the operation of their businesses, for example, the value-added telecommunication business carried out by Wuge.
If Rong Hai and Wuge fail to obtain or maintain any of the required licenses or approvals for its business, we may be subject
to various penalties, such as fines and the discontinuation or restriction of its operations. Any such disruption in the business
operations of Rong Hai and Wuge could materially and adversely affect our business, financial condition and results of
operations.
If the
PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with
applicable PRC laws and regulations, or if these laws and regulations or their interpretations change in the future, we could
be subject to severe penalties or be forced to relinquish our interests in those operations.
PRC laws and
regulations impose certain restrictions and prohibitions on foreign ownership of companies that engage in Internet and other related
businesses. The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020 Version) provides that
foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service
provider other than an e-commerce service provider, among others, and the Provisions on the Administration of Foreign-Invested
Telecommunications Enterprises (2016 Revision) requires that the major foreign investor in a value-added telecommunication service
provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track
record.
To ensure compliance
with the PRC laws and regulations, our wholly owned subsidiary, or WFOE, conduct our business in China mainly through our Wuge
based on a series of contractual arrangements by and among our WFOE, our VIE and the respective shareholders of our VIE, which
enable us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of
our VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in our VIEs when
and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary
beneficiary of our VIE and hence consolidate their financial results into our consolidated financial statements under IFRS. See
“Corporate History and Structure” for further details.
If the contractual
arrangements among our WFOEs, our VIEs and their respective shareholders are determined to be illegal or invalid, or if we or
our VIEs fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have
broad discretion in dealing with such violations or failures, including:
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revoking the business license
and/or operating license of such entities;
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placing restrictions on
our operations or our right to collect revenues;
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imposing fines, confiscating
the income from our WFOEs or VIEs, or imposing other requirements with which we or our VIEs may not be able to comply;
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requiring us to restructure
our ownership structure or operations, including terminating the contractual arrangements and deregistering equity pledges made
by the shareholders of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert
effective control over our VIEs;
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restricting or prohibiting
our use of the proceeds of any offering to finance our business and operations in China; or
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taking other regulatory
or enforcement actions that could be harmful to our business.
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The imposition
of any of these penalties could cause us to lose our right to direct the activities of our VIEs or our right to receive substantially
all of the economic benefits and residual returns from our VIEs and result in a material adverse effect on our ability to conduct
our business. In addition, it is unclear what impact these actions would have on us and on our ability to consolidate the financial
results of our VIEs in our consolidated financial statements, if the PRC government authorities were to find our legal structure
and contractual arrangements to be in violation of PRC laws and regulations. If we are not able to restructure our ownership structure
and operations in a manner satisfactory to relevant PRC regulatory authorities, our results of operations and financial condition
could be materially and adversely affected.
Substantial
uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and
how it may impact the viability of our current corporate structure, corporate governance, business operations and financial results.
On March 15,
2019, the National People’s Congress approved the Foreign Investment Law, which came into effect on January 1, 2020
and replaced the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and
the Foreign Owned Enterprise Law as the legal basis for foreign investment in the PRC. The Foreign Investment Law defines the
“foreign investment” as investment activities in China conducted directly or indirectly by foreign investors in the
following manners: (i) the foreign investor, by itself or together with other investors, establishes a foreign invested enterprise
in China; (ii) the foreign investor acquires shares, equities, asset tranches, or similar rights and interests of enterprises
in China; (iii) the foreign investor, by itself or together with other investors, invests in and establishes new projects
in China; or (iv) the foreign investor invests through other approaches as stipulated by laws, administrative regulations
or as otherwise regulated by the State Council. However, since the Foreign Investment Law is relatively new, uncertainties still
exist in relation to its interpretation and implementation. While the Foreign Investment Law does not explicitly classify contractual
arrangements as a form of foreign investment, it is possible that foreign investment via contractual arrangements may be interpreted
as a type of indirect foreign investment activity that falls within the definition of “foreign investment” or future
laws, administrative regulations or provisions promulgated by the State Council.
In any of these cases, our contractual
arrangements may be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and
regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further
actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to
whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with
any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure
and business operations.
Risks Related to Doing Business in China
A slowdown of the Chinese economy or
adverse changes in economic and political policies of the PRC government could negatively impact China’s overall economic
growth, which could materially adversely affect our business.
We are a holding company
and all of the combined company’s operations are entirely conducted in the PRC. Although the PRC economy has grown in recent
years, the pace of growth has slowed, and even that rate of growth may not continue. The annual rate of growth in the PRC declined
from 6.6% in 2018 to 6.1% in 2019. According to a recent State Information of China forecast, China’s economic growth rate
in 2020 will slow to 6.0%, its lowest since 1990. A slowdown in overall economic growth, an economic downturn or recession or other
adverse economic developments in the PRC may materially reduce the demand for the combined company’s products and may have
a materially adverse effect on its business.
China’s economy
differs from the economies of most other countries in many respects, including the amount of government involvement in the economy,
the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources.
While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods,
regions and economic sectors.
The PRC government
also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any actions and policies adopted by the PRC government could negatively impact the Chinese economy or the economy of the region
the combined company serves, which could materially adversely affect the combined company’s business.
Substantial uncertainties and restrictions
with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant
impact upon the business the combined company may be able to conduct in the PRC and accordingly on the results of its operations
and financial condition.
The combined company’s
business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government
exerts substantial influence and control over the manner in which the combined company must conduct its business activities. The
combined company’s ability to operate in China may be adversely affected by changes in Chinese laws and regulations. Under
the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private
economic activities and greater economic decentralization. However, the government of the PRC may not continue to pursue these
policies, or may significantly alter these policies from time to time without notice.
There are substantial uncertainties
regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations
governing the Company’s business, or the enforcement and performance of the Company’s arrangements with borrowers
in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese
government begin to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters
such as foreign investment, corporate organization and governance, commerce, taxation and trade, as well as encourage foreign
investment in China. Although the influence of the law has been increasing, China has not developed a fully integrated legal system
and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because
these laws and regulations are relatively new, and because of the limited volume of published cases and their lack of force as
precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations
that affect existing and proposed future businesses may also be applied retroactively. In addition, there have been constant changes
and amendments of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy
in China. Because government agencies and courts provide interpretations of laws and regulations and decide contractual disputes
and issues, their inexperience in adjudicating new business and new polices or regulations in certain less developed areas causes
uncertainty and may affect the Company’s business. Consequently, we cannot predict the future direction of Chinese legislative
activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations
in China. The uncertainties, including new laws and regulations and changes of existing laws, as well as judicial interpretation
by inexperienced officials in the agencies and courts in certain areas, may cause possible problems to foreign investors, including
investors in shares of our common stock.
Rong Hai’s and Wuge’s
business is subject to extensive regulation and supervision by state, provincial and local government authorities, which may interfere
with the way the Company conducts its business and may negatively impact its financial results.
Rong Hai and
Wuge is subject to extensive and complex state, provincial and local laws, rules and regulations with regard to its loan operations,
capital structure, maximum interest rates, allowance for loan losses, among other things, as set out in “Business —
Government Regulations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC
on April 17, 2020, and Amendment No. 1 to Annual Report Form 10-K, filed with the SEC on May 14, 2020. These laws, rules and regulations
are issued by different central government ministries and departments, provincial and local governments and are enforced by different
local authorities in China’s Hubei Province, the city of Wuhan, the city of Suzhou, and the city of Chengdu. As a result
of the complexity, uncertainties and constant changes in these laws, rules and regulation, including changes in interpretation
and implementation of such, Rong Hai’s and Wuge’s business activities and growth may be adversely affected if
it does not respond to such changes in a timely manner or is found to be in violation of the applicable laws, regulations and policies
as a result of a position taken by the relevant competent authority in the interpretation of such applicable laws, regulations
and policies that is different from Rong Hai’s and Wuge’s position. If Rong Hai or Wuge is found to be
not in compliance with such laws and regulations, it may be subject to sanctions by regulatory authorities, monetary penalties
and/or reputation damage, which could have a material adverse effect on the Company’s business operations and profitability.
You may experience difficulties in effecting
service of legal process, enforcing foreign judgments or bringing original actions against us or our management, in China, based
upon United States laws, including the U.S. federal securities laws, or other foreign laws.
We are a company incorporated
in Nevada. After the Business Combination, substantially all of our operations will be conducted in China, and substantially all
of our assets will be located in China. All of our current and proposed directors and officers reside in China, and substantially
all of the assets of those persons are located outside of the United States. As a result, Allbright Law, our counsel as to PRC
law, has advised us that it may be difficult for a shareholder to effect service of process within the United States upon these
persons, or to enforce judgments against us which are obtained in United States courts, including judgments predicated upon the
civil liability provisions of the securities laws of the United States or any state in the United States.
Allbright Law has further
advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts
may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on
treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China
does not have any treaties or other form of reciprocity with the United States providing for the reciprocal recognition and enforcement
of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors or officers if they decide that the judgment violates the basic principles of PRC laws, national sovereignty,
security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered
by a court in the United States.
Allbright Law has also
advised us that in the event shareholders originate an action against a company without domicile in China for disputes related
to contracts or other property interests, the PRC courts may accept a cause of action if (a) the disputed contract is concluded
or performed in the PRC or the disputed subject matter is located in the PRC, (b) the company (as defendant) has properties that
can be seized within the PRC, (c) the company has a representative organization within the PRC, or (d) the parties chose to submit
to the jurisdiction of the PRC courts in the contract on the condition that such submission does not violate the requirements of
jurisdiction under the PRC Civil Procedures Law. The action may be initiated by the shareholder by filing a complaint with the
PRC courts. The PRC courts would determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The
shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of
such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in such an action unless
such foreign country restricts the rights of PRC citizens and companies.
Our ability to pay dividends may be
restricted due to foreign exchange control and other regulations of China.
As an offshore holding
company, we will rely principally on dividends from our subsidiary in China, WFOE, for our cash requirements. Under the applicable
PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is
required to set aside a portion of its after-tax profit to fund specific reserve funds prior to payment of dividends. In particular,
at least 10% of its after-tax profits based on PRC accounting standards each year is required to be set aside towards its general
reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable
as cash dividends.
Furthermore, WFOE’s
ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its cash balance. Substantially
all of the Operating Companies’ operations are conducted in China and all of the revenue we recognize, through WFOE will
be denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, WFOE may be unable to distribute
any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars.
The lack of dividends
or other payments from WFOE may limit our ability to make investments or Business Combinations that could be beneficial to our
business, pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available to us to satisfy obligations
which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash
obligations. Accordingly, if we do not receive dividends from WFOE, our liquidity and financial condition will be materially and
adversely affected.
Dividends payable to our foreign investors
and gains on the sale of our shares of common stock by our foreign investors may become subject to tax by the PRC.
Under the Enterprise
Income Tax Law and its implementation regulations issued by the State Council of the PRC, a 10% PRC withholding tax is applicable
to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in
the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment
or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the
transfer of shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption
set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a
PRC resident enterprise, dividends paid on our shares, and any gain realized from the transfer of our shares, would be treated
as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a
PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer
shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in
applicable tax treaties. It is unclear whether we or any of our subsidiaries established outside of China are considered a PRC
resident enterprise, holders of shares would be able to claim the benefit of income tax treaties or agreements entered into between
China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our shares by
such investors are subject to PRC tax, the value of your investment in our shares may decline significantly.
Our global income may be subject to
PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results of operations.
Under the PRC Enterprise
Income Tax Law, or the New EIT Law, and its amendment and implementation rules, which became effective in January 2008, an enterprise
established outside of the PRC with a “de facto management body” located within the PRC is considered a PRC resident
enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define
the term “de facto management bodies” as “establishments that carry out substantial and overall management and
control over the manufacturing and business operations, personnel and human resources, finance and treasury, and Business Combination
and disposition of properties and other assets of an enterprise.” On April 22, 2009, the State Administration of Taxation
(the “SAT”), issued a circular, or SAT Circular 82, which provides certain specific criteria for determining whether
the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although
the SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled
by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general
position on how the “de facto management body” text should be applied in determining the resident status of all offshore
enterprises for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or individuals. Although we
do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the
PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident enterprise and may therefore
be subject to the 25% enterprise income tax on our global income, which could significantly increase our tax burden and materially
and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how the new PRC resident enterprise
classification for tax purposes may apply, it is also possible that the rules may change in the future, possibly with retroactive
effect.
We and our shareholders face uncertainties
with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On February 3, 2015,
the State Administration of Taxation issued an Announcement on Several Issues Concerning Enterprise Income Tax on Income Arising
from Indirect Transfers of Property by Non-PRC Resident Enterprises, or Announcement 7, with the same effective date. Under Announcement
7, an “indirect transfer” refers to a transaction where a non-resident enterprise transfers its equity interest and
other similar interest in an offshore holding company, which directly or indirectly holds Chinese taxable assets (the assets of
an “establishment or place” situated in China; real property situated in China and equity interest in Chinese resident
enterprises) and any indirect transfer without reasonable commercial purposes are subject to the PRC taxation. In addition, Announcement
7 specifies the conditions under which an indirect transfer is deemed to lack a reasonable commercial purpose which include: (1)
75% or more of the value of the offshore holding company’s equity is derived from Chinese taxable assets, (2) anytime in
the year prior to the occurrence of the indirect transfer of Chinese taxable assets, 90% or more of the total assets (excluding
cash) of the offshore holding company are direct or indirect investment in China, or 90% or more of the revenue of the offshore
holding company was sourced from China; (3) the functions performed and risks assumed by the offshore holding company(ies), although
incorporated in an offshore jurisdiction to conform to the corporate law requirements there, are insufficient to substantiate their
corporate existence and (4) the foreign income tax payable in respect of the indirect transfer is lower than the Chinese tax which
would otherwise be payable in respect of the direct transfer if such transfer were treated as a direct transfer. As a result, gains
derived from such indirect transfer will be subject to PRC enterprise income tax, currently at a rate of 10%.
Announcement 7 grants
a safe harbor under certain qualifying circumstances, including transfers in the public securities market and certain intragroup
restricting transactions, however, there is uncertainty as to the implementation of Announcement 7. For example, Announcement 7
requires the buyer to withhold the applicable taxes without specifying how to obtain the information necessary to calculate taxes
and when the applicable tax shall be submitted. Announcement 7 may be determined by the tax authorities to be applicable to our
offshore restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises, being the
transferors, were involved. Though Announcement 7 does not impose a mandatory obligation of filing the report of taxable events,
the transferring party shall be subject to PRC withholding tax if the certain tax filing conditions are met. Non-filing may result
in an administrative penalty varying from 50% to 300% of unpaid taxes. As a result, we and our non-resident enterprises in such
transactions may become at risk of being subject to taxation under Announcement 7, and may be required to expend valuable resources
to comply with Announcement 7 or to establish that we and our non-resident enterprises should not be taxed under Announcement 7,
for any restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial
condition and results of operations.
Enhanced scrutiny over acquisition transactions
by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
The PRC tax authorities
have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests
in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which
became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became effective
in February 2015.
Under Circular 698,
where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident
enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise,
being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use
of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject
to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests
in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has
the power to make a reasonable adjustment to the taxable income of the transaction.
In February 2015, the
SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax
regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect
transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer
of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess
reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity
through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person
who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer”
by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident
enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the
relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard
the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of
reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise
income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable
taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We face uncertainties
on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving
the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such
non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC
subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being
subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required to expend valuable
resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident enterprises should
not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities
have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains based on
the difference between the fair value of the taxable assets transferred and the cost of investment. We may pursue acquisitions in the future that may involve
complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the
PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular 698 and Circular
7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our
financial condition and results of operations.
Restrictions on currency exchange may limit our ability to
utilize our revenue effectively.
Substantially all of
our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes
foreign direct investment and loans. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase
foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the
approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit
or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount
of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our
ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign
currencies to our shareholders. Foreign exchange transactions under the capital account remain subject to limitations and require
approvals from, or registration with, SAFE or banks and other relevant PRC governmental authorities. This could affect our ability
to obtain foreign currency through debt or equity financing for all of our PRC subsidiaries.
Fluctuations in the foreign currency
exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.
The value of the RMB
against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political
and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed
its policy of pegging the value of the RMB to the U.S. dollar. Under this policy, the RMB is permitted to fluctuate within a narrow
and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more
than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow
range against the U.S. dollar. On June 20, 2010, the PBOC announced that the PRC government would reform the RMB exchange rate
regime and increase the flexibility of the exchange rate. In April 2012, the PRC government announced it would allow greater RMB exchange rate fluctuation. On August 11, 12 and
13, 2015, the PRC government successively set the central parity rate for the RMB more than 3% lower in the aggregate than that
of August 10, 2015 and announced that it will begin taking into account previous day’s trading in setting the central parity
rate. In 2015, the yuan experienced a 4.88% drop in value, and on January 4, 2016 the PRC government set the U.S. dollar-Chinese
yuan currency pair to a reference rate of 6.5%, the lowest rate in 4.5 years, on January 6, 2017, the reference rate was 0.9% up-regulated
by the PRC government. However, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange
rate between the RMB and the U.S. dollar in the future. As significant international pressure remains on the PRC government to
adopt a more flexible currency policy, greater fluctuation of the RMB against the U.S. dollar could result.
Our revenues and costs
are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in the RMB. Any significant
fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues,
earnings and financial position, and the amount of and any dividends we may pay on our shares in U.S. dollars. Fluctuations in
the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting
purposes.
If any dividend is declared in the future
and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually
ultimately receive.
If you are a U.S. holder
of our shares of common stock, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them,
even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically,
if a dividend is declared and paid in a foreign currency such as the RMB, the amount of the dividend distribution that you must
include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined
at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income,
regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases
before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S.
dollar amount that you will actually ultimately receive.
Future inflation in China may inhibit
economic activity and adversely affect the combined company’s operations.
The Chinese economy
has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation. This has caused
the PRC government to, from time to time, enact various corrective measures designed to restrict the availability of credit or
regulate growth and contain inflation. High inflation may in the future cause the PRC government to once again impose controls
on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any action on the part of the
PRC government that seeks to control credit and/or prices may adversely affect the combined company’s business operations.
PRC laws and regulations have established
more complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult
for the combined company to pursue growth through acquisitions in China.
Further to the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the
PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which established additional
procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming
and complex, including requirements in some instances that MOFCOM be notified in advance of any change of control transaction in
which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained in circumstances where
overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and
regulations also require certain merger and acquisition transactions to be subject to merger control review and or security review.
The MOFCOM Security
Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on Establishing
the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3,
2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors
is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited
from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases,
loans, control through agreements control or offshore transactions. In addition, Measures for Security Review of Foreign Investment stipulated by NDRC and MOFCOM on December
19, 2020, effective on January 18, 2021, which also provides that security review shall be conducted for the foreign investments
that affect or may affect national security
Further, if the business
of any target company that the combined company seek to acquire falls into the scope of security review, the combined company may
not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any contractual
agreements. The combined company may grow its business in part by acquiring other companies operating in its industry. Complying
with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval
processes, including approval from MOFCOM, may delay or inhibit its ability to complete such transactions, which could affect its
ability to maintain or expand its market share.
In addition, SAFE promulgated
the Circular on the Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 19, on June 1, 2015. Under
Circular 19, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used
within the business scope approved by the applicable governmental authority and the equity investments in the PRC made by the foreign-invested
company shall be subject to the relevant laws and regulations about the foreign-invested company’s reinvestment in the PRC.
In addition, foreign-invested companies cannot use such capital to make the investments on securities, and cannot use such capital
to issue the entrusted RMB loans (except approved in its business scope), repay the RMB loans between the enterprises and the ones
which have been transferred to the third party. Circular 19 may significantly limit our ability to effectively use the proceeds
from future financing activities as the Chinese subsidiaries may not convert the funds received from us in foreign currencies into
RMB, which may adversely affect their liquidity and our ability to fund and expand our business in the PRC.
SAFE issued the Circular
on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular 16”),
on June 9, 2016, which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert
their foreign debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated standard for conversion
of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary
basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that RMB converted from foreign
currency-denominated capital of a company may not be directly or indirectly used for purpose beyond its business scope or prohibited
by PRC Laws or regulations, while such converted RMB shall not be provide as loans to its non-affiliated entities. As Circular
16 is newly issued and SAFE has not provided detailed guidelines with respect to its interpretation or implementation, it is uncertain
how these rules will be interpreted and implemented.
Failure to comply with the United States
Foreign Corrupt Practices Act and Chinese anti-corruption laws could subject us to penalties and other adverse consequences.
As our shares are listed
on Nasdaq, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies
from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.
Non-U.S. companies, including some that may compete with us, may not be subject to these prohibitions. In addition, in 2012, the
central government of the PRC commenced a far-reaching campaign against corruption. That ongoing campaign involves aggressive enforcement
of existing Chinese anti-corruption laws. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur
from time-to-time in the PRC. Our employees or other agents may engage in such conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
SEC administrative proceedings against
the China affiliates of multi-national accounting firms, and/or any related adverse regulatory development in the PRC, may result
in our financial statements being determined to not be in compliance with the requirements of the Exchange Act of 1934, as amended,
or the Exchange Act.
In December 2012, the
SEC brought administrative proceedings against five major accounting firms in China alleging that they had refused to produce audit
work papers and other documents related to certain other China-based companies under investigation by the SEC. On January 22, 2014,
an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing
before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved
by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February
2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid
suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek
to provide the SEC with access to Chinese firms’ audit documents via the Chinese Securities Regulatory Commission. If the
firms do not follow these procedures, the SEC could restart the administrative proceedings.
In the event that the
SEC restarts the administrative proceedings or initiates new proceedings against other firms, depending upon the final outcome,
listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect
of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements
of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms
may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our shares may be
adversely affected.
If our independent
registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely
find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements
could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead
to our delisting from Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate
the trading of our shares in the United States.
If we become directly subject to the
recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources
to investigate and resolve the matter which could harm our business operations and our reputation and could result in a loss of
your investment in our shares, especially if such matter cannot be addressed and resolved favorably.
U.S. public companies
that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity
by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity
has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny,
criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value
and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our company and our business. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are
not proven to be groundless, our company and business operations will be severely hampered and your investment in our stock could
be rendered worthless.
The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.
Our reports and other
filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities
Act and the Exchange Act. Our SEC filings and other disclosure and public pronouncements are not subject to the review or scrutiny
of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review
by CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC
reports, filings and our other public pronouncements with the understanding that no PRC regulator has conducted any review of our
Company, our SEC reports, other filings with non-PRC regulatory authorities or any of our other public pronouncements outside the
U.S.
Risks Related to Our Securities
Volatility
in our common stock price may subject us to securities litigation.
The market for our
common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue
to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities
class action litigation against a company following periods of volatility in the market price of its securities. We may, in the
future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could
divert management’s attention and resources.
A market for
the Company’s securities may not continue, which would adversely affect the liquidity and price of our common stock.
The
price of the Company’s securities may fluctuate significantly due to the market’s reaction and general market and economic
conditions. An active trading market for our securities may never develop or, if developed, it may not be sustained. In addition,
the price of the Company’s securities can vary due to general economic conditions and forecasts, our general business condition
and the release of our financial reports. Additionally, if the Company’s securities are not listed on, or become delisted
from, the Nasdaq Capital Market for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system
for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited
than if we were quoted or listed on the Nasdaq Capital Market or another national securities exchange. You may be unable to sell
your securities unless a market can be established or sustained.
Although
our common stock trades on the Nasdaq Capital Market, there has traditionally only been a small market for our shares of common
stock. For example, in the month of September 2020, our average volume per trading day was under 5,000 shares. While there have
been, and there may continue to be days of exceptionally high volume, our shares may always remain “thinly-traded”,
meaning that the number of persons interested in purchasing our shares at or near bid prices at any given time may be relatively
small or non-existent. This situation may be attributable to a number of factors, including that we are relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume,
and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven
company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence,
there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse
effect on share price. Broad or active public trading market for our shares may be sustained.
We could
issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder
interests and impairing their voting rights; and provisions in our charter documents could discourage a takeover that stockholders
may consider favorable.
Our articles of incorporation, as amended,
authorizes the issuance of up to 20,000,000 shares of “blank check” preferred stock with designations, rights
and preferences as may be determined from time to time by our board of directors. As of the date of this report,
no shares of preferred stock have been designated. Our board of directors is empowered, without stockholder approval, to issue
a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of,
or impair the voting power of, our common stockholders. The issuance of a series of preferred stock could be used as a method
of discouraging, delaying or preventing a change in control. For example, it would be possible for our board of directors
to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control
of our Company.
Our executive officers and directors
own a significant percentage of our common stock and could be able to exert control over matters subject to stockholder approval.
As of March 25, 2021, our directors and
executive officers, together with their affiliates, beneficially own approximately 29.59% of our outstanding shares of common stock.
As a result, our executive officers and directors have influence to determine the outcome of matters submitted to our stockholders
for approval, including the ability to defeat the election of our directors, amend or prevent amendment of our articles of incorporation
or by-laws or effect or prevent a change in corporate control, merger, consolidation, takeover or other business combination. In
addition, any sale of a significant amount of our common stock held by our directors and executive officers, or the possibility
of such sales, could adversely affect the market price of our common stock. Management’s stock ownership may also discourage
a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing any gains from our common stock.
Additional
stock offerings in the future may dilute then-existing shareholders’ percentage ownership of the Company.
Given our plans
and expectations that we will need additional capital in the future, we anticipate that we will need to issue additional shares
of common stock or securities convertible or exercisable for shares of common stock, including convertible preferred stock, convertible
notes, stock options or warrants. The issuance of additional securities in the future will dilute the percentage ownership of then
current stockholders and could negatively impact the price of our common stock.
The market
price of the Company’s securities may be volatile.
The
trading price of our common stock has been volatile and could continue to be subject to wide fluctuations in response to various
factors, some of which are beyond our control. During the 12 months prior to March 24, 2021, our common stock has traded at
a low of $0.70 and a high of $11.62. From the beginning of 2021 through March 24, 2021, our common stock has traded at a low of
$1.79 and a high of $11.62 irrespective of our operating performance and with no discernable announcements or developments by the
company or third parties. We may incur rapid and substantial decreases in our stock price in the foreseeable future that
are unrelated to our operating performance or prospects. In addition, the recent outbreak of COVID-19 has caused broad stock market
and industry fluctuations. The stock market in general and the market for companies such as us in particular have experienced
extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility,
investors may experience losses on their investment in our common stock. A decline in the market price of our common stock also
could adversely affect our ability to issue additional shares of common stock or other of our securities and our ability to obtain
additional financing in the future.
Factors
affecting the trading price of the Company’s securities may include:
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actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
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changes in the market’s expectations about our operating results;
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success of competitors;
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our operating results failing to meet the expectation of securities analysts or investors in a particular period;
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changes in financial estimates and recommendations by securities analysts concerning the Company or the lending market in general;
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operating and stock price performance of other companies that investors deem comparable to the Company;
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our ability to market new and enhanced services on a timely basis;
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changes in laws and regulations affecting our business;
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commencement of, or involvement in, litigation involving the Company;
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the Company’s ability to access the capital markets as needed;
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changes in the Company’s capital structure, such as future issuances of securities or the incurrence of additional debt;
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the volume of common stock available for public sale;
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any major change in our board or management;
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sales of substantial amounts of shares of common stock by our directors, executive officers or significant shareholders or the perception that such sales could occur; and
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general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
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A possible
“short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to additional
price volatility.
Historically there
has not been a large short position in our common stock. However, in the future investors may purchase shares of our common
stock to hedge existing exposure or to speculate on the price of our common stock. Speculation on the price of our common stock
may involve long and short exposures. To the extent an aggregate short exposure in our common stock becomes significant, investors
with short exposure may have to pay a premium to purchase shares for delivery to share lenders at times if and when the price of
our common stock increases significantly, particularly over a short period of time. Those purchases may in turn, dramatically increase
the price of our common stock. This is often referred to as a “short squeeze.” A short squeeze could lead
to volatile price movements in our common stock that are not directly correlated to our business prospects, financial performance
or other traditional measures of value for the Company or its common stock.
Risks Relating to the Conversion
Your rights as a stockholder of the
Company will change as a result of the Conversion and you may not be afforded as many rights as a shareholder of the Company as
an exempted company in Cayman Islands under applicable laws and the memorandum and articles of association (the “Proposed
Articles”) to be adopted after the Conversion under Cayman Islands law as you were as a stockholder of the Company under
applicable laws and the Articles of Incorporation and Bylaws under Nevada law.
Because of differences
between Nevada law and Cayman Islands law, we will be unable to adopt identical governing documents after the Conversion, but we
have attempted to preserve in the Proposed Articles after the Conversion the same allocation of material rights and powers between
the stockholder and our Board that exists under the current Bylaws and Certificate of Incorporation before the Conversion. Nevertheless,
the Proposed Articles differ from the Company’s Bylaws and Articles of Incorporation, both in form and substance, and your
rights as a shareholder will change. For example:
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Under the NRS, a corporation may not engage in a business in combination with an interested stockholder for a period of two years after the time of the transaction in which the person became an interested stockholder. However, there is no equivalent provision under the Companies Law or the Proposed Articles prohibiting business combinations with interested stockholders.
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Under the NRS, any stockholder may, upon written demand under oath stating the purpose thereof, inspect the corporation’s books and records for a proper purpose during the usual hours for business. However, shareholders of a Cayman Islands exempted company do not have any general rights under Cayman Islands law to inspect corporate records of such company, and the Proposed Articles provide that the directors have the discretion as to whether, to what extent, when, where and under what conditions or regulations the accounts and books of the Company may be open to the inspection of shareholders who are not directors.
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Under the NRS, a stockholder may bring a derivative suit provided the requirements to do so under the NRS have been met. However, as a general rule, a derivative action may not be brought by a minority shareholder of a Cayman Islands exempted company, and a minority shareholder may be entitled to bring a derivative action on behalf of the Company after the Conversion only in certain limited circumstances.
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The laws of the Cayman Islands may
not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United
States.
After the Conversion,
our corporate affairs will be governed by the Proposed Articles, by the Companies Law, and by the common law of the Cayman Islands.
The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities
of our directors to the Company under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands.
The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and
from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the Cayman
Islands. The rights of our shareholders and the fiduciary responsibilities of its directors, although clearly established under
Cayman Islands law, are not specifically prescribed in statute or a particular document in the same way that they are in certain
statutes or judicial precedents in some jurisdictions of the United States. In particular, the Cayman Islands has a different body
of securities laws relative to the United States. Therefore, our shareholders may have more difficulty protecting their interests
in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated
in a jurisdiction in the United States. In addition, shareholders of Cayman Islands companies may not have standing to initiate
a shareholder derivative action before the federal courts of the United States. There is uncertainty as to whether the courts of
the Cayman Islands would entertain original actions brought in the Cayman Islands against the Company predicated upon the civil
liabilities provisions of U.S. securities laws.
As a result of different shareholder
voting requirements in the Cayman Islands relative to Nevada, we will have less flexibility with respect to our ability to amend
our constitutional documents and enter into certain business combinations than we now have.
Under Nevada law and
our current Bylaws and Certificate of Incorporation, our Bylaws and Articles of Incorporation may be amended by the vote of a majority
of shares of stock entitled to vote on the matter to approve the amendment, unless the Articles of Incorporation requires the vote
of a greater number of shares. Cayman Islands law requires a special resolution of at
least two-thirds of the shareholder votes cast by those shareholders entitled to vote who are present in person or
by proxy at a general meeting for any amendment to the Proposed Articles. As a result of this Cayman Islands law requirement, situations
may arise where the flexibility we now have under Nevada law would have provided benefits to our stockholders that will not be
available in the Cayman Islands.
In addition, under
Cayman Islands law and the Proposed Articles, certain corporate transactions, such as a merger, require the approval of a special
resolution of at least two-thirds of the shareholder votes cast by those
shareholders entitled to vote who are present in person or by proxy at a general meeting or, if the share capital of the Company
is divided into different classes of shares, the rights attached to any class of shares may be varied with the sanction of a special
resolution at a general meeting of the holders of the shares of that class. By contrast, a merger under Nevada law would only require
a simple majority of the outstanding stock of the company entitled to vote thereon. The increased shareholder approval requirements
may limit our flexibility to enter into or complete certain business combinations that may be beneficial to shareholders.
The expected benefits of the Conversion
may not be realized.
We cannot be assured
that all of the goals of the Conversion will be achievable, and some or all of the anticipated benefits of the Conversion may not
occur, particularly as the achievement of the benefits are in many important respects subject to factors that we do not control.
These factors would include such things as the reactions of third parties with whom we enter into contracts and do business and
the reactions of investors and analysts. In addition, the anticipated reduction of SEC reporting requirements and related expenses
may not be achieved in the event of changes to the SEC rules applicable to foreign private issuers or if we fail to qualify as
a foreign private issuer. While we expect the Conversion will enable us to reduce our operational, administrative, legal and accounting
costs over the long term, these benefits may not be achieved.
Following the completion of the Conversion,
as a foreign private issuer, we will not be required to provide its shareholders with the same information as the Company would
if the Company remained a U.S. public issuer and, as a result, you may not receive as much information about the Company as you
did about the Company and you may not be afforded the same level of protection as a shareholder under applicable laws and the Proposed
Articles as you were as a stockholder under applicable laws and the Company Articles of Incorporation and Bylaws.
Following the completion
of the Conversion, we are expected to qualify as a “foreign private issuer” under the rules and regulations of the
SEC. We will remain subject to the mandates of the Sarbanes-Oxley Act, and, as long as our ordinary shares are listed on the Nasdaq,
the governance and disclosure rules of that stock exchange. However, as a foreign private issuer, we will be exempt from certain
rules under the Exchange Act that would otherwise apply if we were a company incorporated in the United States or did not meet
the other conditions to qualify as a foreign private issuer. For example:
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we may include in its SEC filings financial statements prepared in accordance with U.S. GAAP or with IFRS as issued by the IASB without reconciliation to U.S. GAAP;
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we will not be required to provide as many Exchange Act reports, or as frequently or as promptly, as U.S. companies with securities registered under the Exchange Act. For example, we will not be required to file current reports on Form 8-K within four business days from the occurrence of specific material events. Instead, we will need to promptly furnish reports on Form 6-K any information that we (a) make or are required to make public under the laws of the Cayman Islands, (b) file or are required to file under the rules of any stock exchange or (c) otherwise distribute or are required to distribute to its shareholders. Unlike Form 8-K, there is no precise deadline by which Form 6-K must be furnished. In addition, we will not be required to file its annual report on Form 10-K, which may be due as soon as 60 days after its fiscal year end. As a foreign private issuer, we will be required to file an annual report on Form 20-F within four months after its fiscal year end;
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we will not be required to provide the same level of disclosure on certain issues, such as executive compensation;
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we will not be required to conduct advisory votes on executive compensation;
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we will be exempt from filing quarterly reports under the Exchange Act with the SEC;
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we will not be subject to the requirement to comply with Regulation FD, which imposes certain restrictions on the selected disclosure of material information;
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we will not be required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
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we will not be required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
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We expect to take advantage
of these exemptions if the Conversion is effected. Accordingly, after the completion of the Conversion, if you hold our securities,
you may receive less information about the Company and our business than you currently receive and be afforded less protection
under the U.S. federal securities laws than you are entitled to currently. However, consistent with our policy of seeking input
from, and engaging in discussions with, our stockholders, on executive compensation matters, we intend to provide disclosure relating
to its executive compensation philosophy, policies and practices and conduct an advisory vote on executive compensation once every
three years after the Conversion is effected. However, we expect to review this practice after the next such advisory vote and
may at that time or in the future determine to conduct such advisory votes more frequently or to not conduct them at all.
If we fail to qualify as a foreign
private issuer upon completion of the Conversion, or loses its status as a foreign private issuer at some future time, we would
be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers and would
incur significant operational, administrative, legal and accounting costs that it would not incur as a foreign private issuer.
Following completion
of the Conversion, we are expected to qualify as a “foreign private issuer” under the rules and regulations of the
SEC. As a foreign private issuer, we will be exempt from certain rules under the Exchange Act that would otherwise apply if we
were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. Please
see the section entitled “Risk Factors—Risks Relating to the Conversion—As a foreign private issuer, we will
not be required to provide its shareholders with the same information as the Company would if the Company remained a U.S. public
issuer and, as a result, you may not receive as much information about we as you did about the Company and you may not be afforded
the same level of protection as a shareholder under applicable laws and the Proposed Articles as you were as a stockholder under
applicable laws and the Company Articles of Incorporation and Bylaws.” While we are expected to qualify as a foreign private
issuer following the completion of the Conversion, if we fail to qualify as a foreign private issuer upon completion of the Conversion,
or loses its status as a foreign private issuer at some future time, we will be required to comply fully with the reporting requirements
of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting
costs that it would not incur as a foreign private issuer.
If we prepare our financial statements
in accordance with IFRS following the Conversion, there may be a significant effect on our reported financial results.
The SEC permits foreign
private issuers to file financial statements in accordance with IFRS as issued by IASB. At any time in the future, as a foreign
private issuer, we may decide to prepare our financial statements in accordance with IFRS as issued by the IASB. The application
by us of different accounting standards, a change in the rules of IFRS as issued by the IASB, or in the SEC’s acceptance
of such rules, could have a significant effect on our reported financial results. Additionally, U.S. GAAP is subject to interpretation
by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Public Company Accounting
Oversight Board, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. IFRS are subject
to interpretation by the IASB. A change in these principles or interpretations could have a significant effect on our reported
financial results.
Changes in domestic and foreign laws,
including tax law changes, could adversely affect the Company, its subsidiaries and its shareholders, and our effective tax rate
may increase whether we effect the Conversion or not.
Changes in tax laws,
regulations or treaties or the interpretation or enforcement thereof, in both or either of the U.S. or Cayman Islands, could adversely
affect the tax consequences of the Conversion to an exempted company in Cayman Islands and the shareholders and/or our effective
tax rates (whether associated with the Conversion or otherwise). While the Conversion is not anticipated to have any material impact
on our effective tax rate, there is uncertainty regarding the tax policies of the jurisdictions where we operate, and our effective
tax rate may increase and any such increase may be material.
The enforcement of civil liabilities
against the Company may be more difficult.
After the Conversion,
all of our executive officers and directors will continue to reside outside of the United States. As a result, it may be more difficult
to serve legal process within the United States upon any of these persons and it may also be difficult to enforce, both in and
outside of the United States, judgments you may obtain in the U.S. courts against these persons in any action, including actions
based upon the civil liability provisions of U.S. federal or state securities laws. Because we will be a Cayman Islands corporation,
investors could also experience more difficulty enforcing judgments obtained against the Company in U.S. courts than would currently
be the case for U.S. judgments obtained against the Company. In addition, it may be more difficult (or impossible) to bring some
types of claims against the Company in Cayman Islands courts than it would be to bring similar claims against a U.S. company in
a U.S. court.
The market for our shares after the
Conversion may differ from the market for our shares before the Conversion.
Although it is anticipated
that our ordinary shares after the Conversion will continue to be listing on Nasdaq Capital Market under the symbol “CCNC,”
as a company incorporated under the laws of the Cayman Islands, the shares may appeal to different institutional investors, or
impact the level of investment by current investors who may prefer or be required by internal guidelines to invest in companies
that are incorporated in the United States. Accordingly, the reorganization may impact our institutional investor base, or the
level of their respective investments in our securities, and may result in a change in the market prices, trading volume and volatility
of the shares before and after the Conversion.
We expect to incur transaction costs
and adverse financial consequences in the year of completion of the Conversion.
We expect a total of
approximately $30,000 in transaction costs in connection with the Conversion, which have been and will continue to be expensed
as incurred. The substantial majority of these costs will be incurred regardless of whether the Conversion is completed and prior
to your vote on the proposal. We expect to incur costs and expenses, including professional fees, to comply with the Cayman Islands
corporate and other laws. In addition, we expect to incur attorneys’ fees, accountants’ fees, filing fees, mailing
expenses, proxy solicitation fees and financial printing expenses in connection with the Conversion, even if the Conversion is
not approved or completed.
The Conversion also
may negatively affect us by diverting attention of our management and employees from our operating business during the period of
implementation and by increasing other administrative costs and expenses.
Our Board of Directors may choose
to defer or abandon the Conversion.
Completion of the Conversion
may be deferred or abandoned, at any time, by action of our Board of Directors. While we currently expect the Conversion to take
place promptly after certain regulatory requirements and approvals are met and obtained, our Board of Directors may defer or abandon
the Conversion because of, among other reasons, changes in existing or proposed laws, our determination that the Conversion would
involve tax or other risks that outweigh their benefits, our determination that the level of expected benefits associated with
the Conversion would otherwise be reduced, a dispute with the taxation authorities over the Conversion (or certain aspects thereof),
an unexpected increase in the cost to complete the Conversion or any other determination by our Board of Directors that the Conversion
would not be in the best interests of the Company or its stockholders or that the Conversion would have material adverse consequences
to the Company or its stockholders.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Rong Hai’s
office is located at 4th Floor, West Hongqiao Building, No.180 West Qingnian Road, Nantong City, Jiangsu, China. The
rent for this space is approximately RMB225,600 per year.
Wuge’s office
is located at 119 Zhaojuesi South Road, Room 2-1, Chengshu City, Sichuan, China. The rent for this office is approximately RMB
400,000 per year.
We consider our current
office space adequate for our current operations.
Item 3. Legal Proceedings
To the knowledge of
our management, there is no litigation currently pending or contemplated against us, any of our officers or directors in their
capacity as such or against any of our property.
Item 4. Mine Safety Disclosures
Not applicable.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO 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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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 Decemeber 31, 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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
On December 27, 2018, the Company, entered
into an Equity Purchase Agreement with Hopeway International Enterprises Limited., a private limited company duly organized under
the laws of British Virgin Islands (the “Hopeway”). Pursuant to the Equity Purchase Agreement, Shengrong WOFE shall
sell 100% equity interests in Hubei Shengrong to Hopeway in exchange for Hopeway’s agreement to irrevocably forfeit and cancel
8,523,320 shares of common stock of the Company, constituting all the shares owned by Hopeway. The transaction contemplated by
the Equity Purchase Agreement is hereby referred as Disposition. The Company’s decision to dispose of Hubei Shengrong is
due to the planning mandates of Wuhan Municipal Government 2018 which manufactures should move away from city’s downtown
area. Therefore, due to the policy change, Hubei Shengrong is forced to close the existing facility, relocate and build a new facility,
which is expected to take approximately 7-8 years. As a result, Hubei Shengrong will not be able to keep the production running
and will generate no income in the foreseeable future. Management believed it is very difficult, if possible at all, to continue
manufacturing of solid waste recycling systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while
retaining the research and development and sale of solid waste recycling systems business. Upon closing of the Disposition, Hopeway
will become the sole shareholder of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except
the research and development team and intellectual property rights in connection with the solid waste recycling systems business
shall be assigned to Shengrong WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the
sale of solid waste recycling systems business and the processed industrial waste materials trading business, this restructuring
did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore,
the results of operations for Hubei Shengrong were not reported as discontinued operations under the guidance of Accounting Standards
Codification 205.
In April 2019, TMSR Holdings Limited (“TMSR
HK”), our indirect wholly owned subsidiary, was incorporated under the laws of Hong Kong.
In August 2019, Tongrong Technology (Jiangsu)
Co., Ltd. (“Tongrong WFOE”), our indirect wholly owned subsidiary, was incorporated under the laws of PRC.
In August 2019, Citi Profit Investment
Holding Limited (“Citi Profit”), an exempted company formed under the laws of the British Virgin Islands, became our
wholly owned subsidiary.
TMSR HK, Tongrong WFOE and Citi Profit
are all holding companies that do not have any substantive business operations.
On January 3, 2020, the Company entered
into a share purchase agreement with Sichuan Wuge Network Games Co., Ltd. (“Wuge”) and all the shareholders of Wuge,
including Wei Xu, Bibo Lin, Jiangsu Lingkong Network Joint Stock Co., Ltd., which is controlled by Wei Xu, and Anhui Shuziren Network
Technology Co., Ltd., which is also controlled by Wei Xu. Pursuant to the share purchase agreement, on January 24, 2020, the Company
issued an aggregate of 4,000,000 shares of TMSR’s common stock to the shareholders of Wuge, in exchange for Wuge’s
shareholders’ agreement to enter into, and their agreement to cause Wuge to enter into, certain VIE agreements (the “Wuge
VIE Agreements”) with Tongrong WFOE, through which Tongrong WFOE has the right to control, manage and operate Wuge in return
for a service fee equal to 100% of Wuge’s net income.
On April 30, 2020, Tongrong WFOE entered
into a series of assignment agreements with Shengrong WFOE, Rong Hai and shareholders of Rong Hai, pursuant to which Shengrong
WFOE assign all its rights and obligations under the Rong Hai VIE Agreements to Tongrong WFOE. The Rong Hai VIE Agreements and
the Assignment Agreements grant Tongrong WFOE with the power, rights and obligations equivalent in all material respects to those
it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets,
property and revenue of Rong Hai. The assignment does not have any impact on Company’s consolidated financial statements.
Effective May 18, 2020, the Company changed
its corporate name from “TMSR Holding Company Limited” to “Code Chain New Continent Limited” pursuant to
a Certificate of Amendment to the Company’s Articles of Incorporation filed with the Secretary of State of the State of Nevada.
In connection with the name change, effective May 18, 2020, the ticker symbol of the Company’s common stock and warrants
changed from “TMSR” and “TMSRW” to “CCNC” and “CCNCW”, respectively.
On June 30, 2020, the Company entered into
a share purchase agreement with Jiazhen Li, former CEO of the Company (the “Buyer”), Long Liao and Chunyong Zheng,
who are former shareholders of Wuhan HOST Coating Materials Co., Ltd., an indirect subsidiary of the Company, (collectively the
“Payees”). Pursuant to the Agreement, the Company agreed to sell, and the Buyer agreed to purchase all the issued and
outstanding ordinary shares of China Sunlong (the “Sunlong Shares”). The Payees have a prior relationship with the
Buyer and have agreed to be responsible for the payment of the purchase price on behalf of Buyer. The purchase price for the Sunlong
Shares shall be $1,732,114, payable in consideration of cancellation of 1,012,932 shares of the Company owned by the Payees (the
“CCNC Shares”). The CCNC Shares are valued at $1.71 per share, based on the closing price of the Company’s common
stock on June 30, 2020. The CCNC Shares were cancelled on August 31, 2020.
In December 2020, Makesi Iot Technology
(Shanghai) Co., Ltd. (“Makesi WFOE”), our indirect wholly owned subsidiary, was incorporated under the laws of PRC.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
|
Makesi WFOE
|
|
●
|
A PRC limited liability company and deemed a wholly foreign
owned enterprise (“WFOE”)
Incorporated on December 2020
|
|
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
|
|
|
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
●
|
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 Makesi 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
|
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On
January 11, 2021, Makesi WFOE entered into a series of assignment agreements (the “Assignment Agreements”) with Tongrong
WFOE, Wuge and Wuge Shareholders, pursuant to which Tongrong WFOE assign all its rights and obligations under the VIE Agreements
to Makesi WFOE (the “Assignment”). The VIE Agreements and the Assignment Agreements grant Makesi WFOE with the power,
rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Wuge, including
absolute rights to control the management, operations, assets, property and revenue of Wuge. The Assignment does not have any impact
on Company’s consolidated financial statements.
On June 30, 2020, the Company
disposed of China Sunlong Environmental Technology Inc., The Company’s assets and liabilities on its consolidated
balance sheets as of December 31, 2020 and December 31, 2019 and its statements of operations for the years ended December 31,
2020 and 2019 have been grouped and re-grouped based on this designation. The Company re-organized its operations to focus its resources
on businesses that management believes will bring future profits to the Company.
As of the date of this report, substantially all of the Company’s
primary operations are conducted in the PRC.
Note 2 – Summary of significant
accounting policies
Basis of presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).
Principles of consolidation
The consolidated financial statements
of the Company include the accounts of CCNC and its wholly owned subsidiaries and VIEs. All intercompany transactions and balances
are eliminated upon consolidation.
Use of estimates and assumptions
The preparation of 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 consolidated financial statements
and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the
Company’s consolidated financial statements include the useful lives of intangible assets, revenues, deferred revenues and
plant and equipment, impairment of long-lived assets, collectability of receivables, inventory valuation allowance, 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 results of operations 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 income (loss) amounted to $ 935,638 and $(832,267) as of December 31, 2020 and 2019,
respectively. The balance sheet amounts, with the exception of shareholders’ equity as of December 31, 2020 and 2019
were translated at 6.52 RMB and 6.98 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 years ended December 31, 2020
and 2019 were 6.90 RMB and 6.90 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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The PRC government imposes significant
exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not
had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
Investments
The Company purchases certain liquid short
term investments such as money market funds and or other short term debt securities marketed by financial institutions. These
investments are not insured against loss of principal. These investments are accounted for as financial instruments that are marked
to fair market value at the end of each reporting period. For investments that are held to maturity debt instruments, which have
short maturities, and limited risk profiles, amortized cost may be the best approximation of their fair value and used for such
investments.
Accounts receivable, net
Accounts receivable include trade accounts
due from customers. An allowance for doubtful accounts may be established and recorded based on management’s assessment of
potential losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular
basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances
are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not
probable.
Inventories
Inventories are comprised of raw materials
and work in progress and are stated at the lower of cost or net realizable value using the 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 December 31, 2020 and 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 to be received. As a standard practice in China, many of the Company’s vendors require a
partial or full payment prior to production and shipment of finished goods 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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets
Intangible assets represent land use
rights and patents and software licenses, 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 2020, 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. In 2020, the Company recognized approximately $3.89 million in impairment
of goodwill related to Rong Hai.
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, short term
held to maturity investments, 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.
|
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Rong Hai will from time to time receive
payment in advance from its customers for products to be delivered within one operating period.
Wuge typically receives customer deposits for services to be
rendered from its customers. As Wuge delivers the services, it will recognize these deposits to results of operations in accordance
to its revenue recognition policy.
Revenue recognition
On January 1, 2018, the Company adopted
Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective
method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings
upon adoption of this new guidance as the Company’s revenue, other than retainage revenues, was recognized based on the amount
of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the Company’s
retainage revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.
The core principle underlying the revenue
recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount
that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to
identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time,
based on when control of goods and services transfers to a customer. The Company’s revenue streams are primarily recognized
at a point in time except for the retainage revenues where the retainage periods are recognized over the retainage period, usually
is a period of twelve months.
The ASU requires the use of a new five-step
model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with
the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction
price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the
performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result
in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition
policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new
guidance and confirmed that there were no differences in the pattern of revenue recognition except its retainage revenues.
An entity will also be required to determine
if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement
as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition
of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but does not
control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is
entitled to retain in the exchange.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended December 31, 2020, less than 5%
of our retainage revenues were recognized in our consolidated revenues and included in the Company’s equipment and systems
revenues in the accompanying statements of income and comprehensive income.
Payments received prior to the relevant
criteria for revenue recognition are met, are recorded as customer deposits.
The Company’s disaggregate revenue
streams are summarized as follows:
|
|
For the year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues – Equipment and systems
|
|
$
|
-
|
|
|
$
|
-
|
|
Revenues – Fuel materials
|
|
|
11,261,428
|
|
|
|
18,955,988
|
|
Revenues – Trading and others
|
|
|
591,455
|
|
|
|
628,489
|
|
Total revenues
|
|
$
|
11,852,883
|
|
|
$
|
19,584,477
|
|
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.
Fuel materials revenue
After consideration of risk and reward, and the guidance under
ASC 606, the Company has determined that is a principal in its fuel materials business, and accounts for revenues and costs revenue
using the gross method.
Services revenue
Wuge recognizes service revenue under contracts
with customers on a percentage of completion of each contract based on the receipt of objective acknowledgement by its customer
that the Company has rendered a specific percentage of total services set forth in the contract. As of December 31, 2020, Wuge
had entered into approximately RMB 97 million in service contracts, of which approximately RMB 6.9 million has been received in
funds and approximately RMB 4.0 million has been recognized as revenue. As of December 31, 2020, approximately RMB 92 million in
contract services have yet to be rendered or recognized.
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 year ended December
31, 2020 and 2019, respectively.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases
In accordance ASC 842, the Company determines
if an arrangement is a lease at inception. Operating and leases are recognized as its own right-of-use (“ROU”) asset
category in the Company’s non-current assets, and the corresponding lease obligations are recognized to current and non-current
liabilities.
ROU assets represent the right to use an
underlying asset for the lease term and lease liabilities represents the Company’s obligation to make lease payments arising
from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease
payments over the lease term. If the lease does not provide an implicit rate, management generally uses the Company’s incremental
borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at
commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives.
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 are 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 year ended December 31, 2020 and 2019. As of December
31, 2020, the Company’s PRC tax returns filed for 2017, 2018 and 2019 remain subject to examination by any applicable tax
authorities.
Earnings per share
Basic earnings per share are computed by
dividing income available to common shareholders of the Company by the weighted average common shares outstanding during the period.
Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue
common shares were exercised and converted into common shares. 9,079,348 and 10,500,000 of outstanding warrants which is equivalent
to convertible of 4,539,674 and 5,250,000 common shares were excluded from the diluted earnings per share calculation due to its
anti-dilutive effect for the year ended December 31, 2020 and 2019, respectively. 824,000 of outstanding options were excluded
from the diluted earnings per share calculation due to its anti-dilutive effect for the year ended December 31, 2020 and 2019.
Recently issued accounting pronouncements
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement
– Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented
in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update
is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial
statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not
yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively
to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and
Jobs Act is recognized. The Company does not believe the adoption of this ASU would have a material effect on the Company’s
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 consolidated
balance sheets, statements of income and comprehensive income and statements of cash flows.
In December 2019, the FASB issued a new standard to simplify
the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation,
the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside
basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies
aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions
that result in a step-up in the tax basis of goodwill. The Company is currently evaluating the impact of this standard to its consolidated
financial statements.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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 Qihai 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, TMSR shall issue an aggregate of
4,630,000 shares of TMSR’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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
For the year ended December 31, 2020, the Company recorded an
impairment in the amount of $3,896,818. The Company did not record an impairment
of goodwill for the year ended December 31, 2019.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company did not record any impairment of goodwill related to Wuge for the year ended December 31, 2020.
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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, which are both determined to be businesses, 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:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
9,600,157
|
|
|
$
|
8,687,451
|
|
Property, plants and equipment
|
|
|
1,268,272
|
|
|
|
19,057
|
|
Other noncurrent assets
|
|
|
196,415
|
|
|
|
127,782
|
|
Goodwill
|
|
|
11,650,157
|
|
|
|
7,289,454
|
|
Total assets
|
|
|
22,715,001
|
|
|
|
16,123,744
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
8,766,619
|
|
|
|
6,067,264
|
|
Non-current liabilities
|
|
|
33,698
|
|
|
|
61,580
|
|
Total liabilities
|
|
|
8,800,317
|
|
|
|
6,128,844
|
|
Net assets
|
|
$
|
13,914,684
|
|
|
$
|
9,994,900
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
475,103
|
|
|
$
|
-
|
|
Accounts payable
|
|
|
1,037,723
|
|
|
|
619,329
|
|
Other payables and accrued liabilities
|
|
|
103,323
|
|
|
|
301,230
|
|
Other payables – related party
|
|
|
6,090,841
|
|
|
|
5,082,068
|
|
Tax payables
|
|
|
57,815
|
|
|
|
202
|
|
Customer Advances
|
|
|
900,522
|
|
|
|
3,426
|
|
Lease liabilities
|
|
|
101,292
|
|
|
|
61,009
|
|
Total current liabilities
|
|
|
8,766,619
|
|
|
|
6,067,264
|
|
Lease liabilities - noncurrent
|
|
|
33,698
|
|
|
|
61,580
|
|
Total liabilities
|
|
$
|
8,800,317
|
|
|
$
|
6,128,844
|
|
The summarized operating results of the
VIE’s are as follows:
|
|
For the year ended
December 31,
|
|
|
|
2020
|
|
|
|
|
|
Operating revenues
|
|
$
|
11,852,883
|
|
Gross profit
|
|
|
1,114,981
|
|
Income from operations
|
|
|
(599,913
|
)
|
Net income
|
|
$
|
(539,398
|
)
|
The Company has the option but is not obligated to provide financial
support if Wuge or Rong Hai become insolvent. The assets of Wuge and Rong Hai are typically used to the settle their own respective
obligations.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Accounts receivable and accounts receivable
– related party
Accounts receivable consist of the following:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,670,526
|
|
|
$
|
2,221,319
|
|
Less: Allowance for doubtful accounts
|
|
|
(598,936
|
)
|
|
|
(24,055
|
)
|
Total accounts receivable, net
|
|
$
|
1,071,590
|
|
|
$
|
2,197,264
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
-
|
|
Beginning balance from Wuhan HOST
|
|
|
-
|
|
|
|
260,764
|
|
Beginning balance from Rong Hai
|
|
|
24,055
|
|
|
|
472,082
|
|
Depositing ending balance of Hubei Shengrong
|
|
|
-
|
|
|
|
-
|
|
Addition
|
|
|
542,087
|
|
|
|
-
|
|
Recovery and reversals
|
|
|
-
|
|
|
|
(708,791
|
)
|
Exchange rate effect
|
|
|
32,794
|
|
|
|
-
|
|
Ending balance
|
|
$
|
598,936
|
|
|
$
|
24,055
|
|
Note 6 – Inventories
Inventories consist of the following:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
-
|
|
Work in progress
|
|
|
-
|
|
|
|
-
|
|
Finished goods
|
|
|
1,047,274
|
|
|
|
1,197,065
|
|
Total inventories
|
|
$
|
1,047,274
|
|
|
$
|
1,197,065
|
|
Note 7 – Plant and equipment, net
Plant and equipment consist of the following:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Office equipment and furniture
|
|
|
76,605
|
|
|
|
39,688
|
|
Automobile
|
|
|
272,902
|
|
|
|
209,057
|
|
Subtotal
|
|
|
349,507
|
|
|
|
248,745
|
|
Less: accumulated depreciation and amortization
|
|
|
(266,674
|
)
|
|
|
(229,688
|
)
|
Total
|
|
$
|
82,833
|
|
|
$
|
19,057
|
|
Depreciation and amortization expense for
the year ended December 31, 2020 and 2019 amounted to $19,869 and $8,345, respectively.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Intangible assets, net
Intangible assets consist of the following:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Development of technology
|
|
$
|
1,226,072
|
|
|
$
|
-
|
|
Software
|
|
|
598
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
(149
|
)
|
|
|
-
|
|
Net intangible assets
|
|
$
|
1,226,521
|
|
|
$
|
-
|
|
Amortization expense for the year ended
December 31, 2020 and 2019 amounted to $141 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
|
|
$
|
-
|
|
|
$
|
7,289,454
|
|
|
$
|
-
|
|
|
$
|
7,289,454
|
|
Goodwill acquired through acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
7,140,304
|
|
|
|
7,140,304
|
|
Goodwill impairments
|
|
|
-
|
|
|
|
(3,896,818
|
)
|
|
|
|
|
|
|
(3,896,818
|
)
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
504,181
|
|
|
|
613,036
|
|
|
|
1,117,217
|
|
Balance as of December 31, 2020
|
|
$
|
-
|
|
|
$
|
3,896,817
|
|
|
$
|
7,753,340
|
|
|
$
|
11,650,157
|
|
Note 10 – Related party balances and transactions
Related party balances
|
a.
|
Other receivable –
related party:
|
Name of related party
|
|
Relationship
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu Yuan Code Chain Technology Co. Ltd
|
|
A company controlled by former shareholder of the Company
|
|
$
|
230,134
|
|
|
$
|
|
|
The Company advanced funds to the related party for technical
services.
|
b.
|
Other payables – related parties:
|
Name of related party
|
|
Relationship
|
|
December 31,
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
|
|
Qihai Wang
|
|
Shareholder of the Company
|
|
|
24,729
|
|
|
|
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
|
|
|
|
$
|
491,136
|
|
|
$
|
1,336,902
|
|
The above payables represent interest free
loans and advances. These loans and advances are unsecured and due on demand.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Loan from Bank of Jiangsu
|
|
March 25, 2021
|
|
|
|
4.5
|
%
|
|
Personnel guarantee
|
|
$
|
268,203
|
|
|
|
-
|
|
Loan from Bank of Jiangsu
|
|
January 12, 2021
|
|
|
|
5.22
|
%
|
|
Guaranteed by Shibao Lin’s personal property
|
|
|
206,900
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
475,103
|
|
|
|
|
|
Interest expense for the year ended December
31, 2020 and 2019 amounted to $18,235 and $23,251, 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 year ended
December 31, 2020 amounted to approximately $1.4 million. As of December 31, 2020, CCNC’s net operating loss carry forward
for United States income taxes was approximately $0.30 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 year ended December 31, 2019 and 2018, which the Company believes that it
will be imposed a minimum tax rate of 10.5% and to the extent foreign tax credits are available to reduce its US corporate tax,
which may result in no additional US federal income tax being due.
Cayman Islands
China Sunlong is incorporated in the Cayman
Islands and are not subject to tax on income or capital gains under current Cayman Islands law. In addition, upon payments of dividends
by China Sunlong to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Shengrong BVI and TJComex BVI are 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.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended December 31,
2020
|
|
|
For the year ended
December 31,
2019
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
49,054
|
|
Deferred
|
|
|
(60,515
|
)
|
|
|
79,745
|
|
Total provision for income taxes
|
|
$
|
(60,515
|
)
|
|
$
|
128,799
|
|
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:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Net operating losses carried forward – U.S.
|
|
$
|
303,560
|
|
|
$
|
17,309
|
|
Net operating losses carried forward – PRC
|
|
|
|
|
|
|
-
|
|
Bad debt allowance
|
|
|
127,377
|
|
|
|
37,532
|
|
Valuation allowance
|
|
|
(303,560
|
)
|
|
|
(17,309
|
)
|
Deferred tax assets, net
|
|
$
|
127,377
|
|
|
$
|
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:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
VAT taxes payable
|
|
$
|
1,589
|
|
|
$
|
-
|
|
Income taxes payable
|
|
|
70,914
|
|
|
|
-
|
|
Other taxes payable
|
|
|
136
|
|
|
|
202
|
|
Total
|
|
$
|
72,639
|
|
|
$
|
202
|
|
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2 years.
The Company’s lease agreements do
not contain any material residual value guarantees or material restrictive covenants.
For the year ended December 31, 2020 and
2019, rent expenses amounted to $32,698 and $32,711, respectively.
The Company’s
future lease obligations are presented below:
Twelve months ended December, 31
|
|
Operating
lease
amount
|
|
2021
|
|
$
|
103,726
|
|
2022
|
|
|
34,575
|
|
Total lease payments
|
|
|
138,301
|
|
Less: interest
|
|
|
(3,311
|
)
|
Present value of lease liabilities
|
|
$
|
134,990
|
|
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 December 31, 2020 and 2019, no cash were deposited with various financial institutions located in the U.S.
As of December 31, 2020 and 2019, $998,717 and $2,483,213 and were deposited with various financial institutions located in
the PRC, respectively. As of December 31, 2020 and 2019, $0 and $354 were deposited with one financial institution located in
Hong Kong, respectively. While management believes that these financial institutions are of extremely high credit quality, it also
continually monitors their credit worthiness. Should these financial institutions holding the Company’s deposits become
insolvent, the Company may lose the entirety of its deposit; however, management believes that is extremely remote, and
unlikely.
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 year ended December 31, 2020, one
customer accounted for 74.8% of the Company’s revenues. For the year ended December 31, 2019, three customers accounted for
35.3%, 23.7% and 14.4% of the Company’s revenues.
As of December 31, 2020, two customers
accounted for 48.4% and 44.3% of the Company’s accounts receivable; and one customer accounted for 100% of the Company’s
Customer Advances. As of December 31, 2019, two customers accounted for 77.0% and 21.9% of the Company’s accounts receivable.
For the year ended December 31, 2020, three
suppliers accounted for 23.4%, 22.3% and 14.1% of the Company’s total purchases. For the year ended December 31, 2019, four
suppliers accounted for 23.2%, 11.9%, 11.4% and 11.1% of the Company’s total purchases.
As of December 31, 2020, two suppliers
accounted for 52.5% and 28.4% of the Company’s total prepayments; and three suppliers accounted for 42.3%, 28.6% and 26.5%
of the Company’s total accounts payable. As of December 31, 2019, two suppliers accounted for 70.2% and 11.5% of the Company’s
total prepayments; and four suppliers accounted for 45.5%, 25.0%, 16.4% and 13.1% of the Company’s total accounts payable.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2020 and 2019, amounts restricted are the net assets of Tongrong
WFOE, Wuge and Rong Hai which amounted to $2,247,476 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 affected
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 aggregate proceeds of $133,335 pursuant to certain securities purchase agreement dated
April 20, 2018 and June 22, 2018. The issuances were pursuant to the exemption from registration under Regulation S promulgated
under the Securities Act of 1933, as amended.
On February 12, 2019, the Company’s
warrant holders converted 294,971 of the Company’s warrants into 52,077 shares of the Company’s common stock using
cashless exercises method.
On February 20, 2019, the Company’s
warrant holders converted 415,355 of the Company’s warrants into 54,826 shares of the Company’s common stock using
cashless exercises method.
On March 11, 2019, the Board granted an
aggregate of 131,330 shares of restricted common stock, with a fair value of $261,347, determined using the closing price of $1.99
on March 11, 2019, to repay the debt the Company owed to two unrelated third parties. As the carrying value of the debt equaled
to the fair value of the 131,330 common shares at $1.99 per share, no gain or loss were recognized upon this debt settlement.
On March 15, 2019, the Board granted an
aggregate of 142,530 shares of restricted common stock, with a fair value of $290,761, determined using the closing price of $2.04
on March 15, 2019, to repay the debt the Company owed to one unrelated third party. As the carrying value of the debt equaled to
the fair value of the 142,530 common shares at $2.04 per share, no gain or loss were recognized upon this debt settlement.
On April 4, 2019, the Company entered into
certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities
Act of 1933, as amended pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per
share, at a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million.
On November 20,2019, the company wrote
off 947,037 common shares.
On December 23, 2019, the Company entered into certain securities purchase agreement (the “SPA”) with certain “non-U.S.
Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities
Act”) pursuant to which the Company agreed to sell 3,692,859 shares of its common stock (“Common Stock”), par
value $0.0001 per share, at a per share purchase price of $1.00. The net proceeds to the Company from this offering will be approximately
$3.66 million.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Warrants
Outstanding
|
|
|
Exercisable
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Life
|
|
December 31, 2019
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
3.14
|
|
Granted/Acquired
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
December 31, 2020
|
|
|
9,079,348
|
|
|
|
4,539,674
|
|
|
$
|
5.75
|
|
|
|
2.13
|
|
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The summary of option activity is as follows:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
Outstanding
|
|
|
Exercise
Price
|
|
|
Contractual
Life
|
|
December 31, 2019
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
4.16
|
|
Granted/Acquired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
December 31, 2020
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
2.13
|
|
Note 16 – Commitments and contingencies
Contingencies
From time to time, the Company may be subject to certain legal
proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings
cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial
position, results of operations or liquidity.
Note 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 are Rong Hai and Wuge. 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 and Wuge’s performance.
The following represents assets and
revenues by segments:
Total assets as of
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Rong Hai and Tongrong WFOE
|
|
$
|
15,006,063
|
|
|
$
|
17,407,872
|
|
Wuge
|
|
|
2,304,566
|
|
|
|
-
|
|
CCNC, Citi Profit BVI and TMSR HK
|
|
|
7,824,490
|
|
|
|
71,521
|
|
Total Assets
|
|
$
|
25,135,119
|
|
|
$
|
17,479,393
|
|
Total revenues of
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Rong Hai and Tongrong WFOE
|
|
$
|
11,261,428
|
|
|
$
|
19,584,477
|
|
Wuge
|
|
|
591,455
|
|
|
|
-
|
|
CCNC, Citi Profit BVI and TMSR HK
|
|
|
-
|
|
|
|
-
|
|
Total Assets
|
|
$
|
11,852,883
|
|
|
$
|
19,584,477
|
|
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 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 year ended December 31, 2020 and 2019.
|
|
December 31,
|
|
|
December 31,
|
|
Financial Position
|
|
2020
|
|
|
2019
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
-
|
|
|
|
1,544,177
|
|
Notes receivable
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
-
|
|
Other receivables, net
|
|
|
-
|
|
|
|
-
|
|
Other receivable - related party
|
|
|
-
|
|
|
|
-
|
|
Inventories
|
|
|
-
|
|
|
|
-
|
|
Prepayments
|
|
|
-
|
|
|
|
-
|
|
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
|
)
|
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
December 31,
|
|
|
December 31,
|
|
Results of Operations
|
|
2020
|
|
|
2019
|
|
REVENUES
|
|
|
|
|
|
|
Equipment and systems
|
|
$
|
-
|
|
|
$
|
3,621,835
|
|
Coating and fuel materials
|
|
|
-
|
|
|
|
6,424,564
|
|
Trading and others
|
|
|
-
|
|
|
|
-
|
|
TOTAL REVENUES
|
|
|
-
|
|
|
|
10,046,399
|
|
|
|
|
-
|
|
|
|
-
|
|
COST OF REVENUES
|
|
|
-
|
|
|
|
-
|
|
Equipment and systems
|
|
|
-
|
|
|
|
1,365,340
|
|
Coating and fuel materials
|
|
|
-
|
|
|
|
5,576,828
|
|
Trading and others
|
|
|
-
|
|
|
|
-
|
|
TOTAL COST OF REVENUES
|
|
|
-
|
|
|
|
6,942,168
|
|
|
|
|
-
|
|
|
|
|
|
GROSS PROFIT
|
|
|
-
|
|
|
|
3,104,231
|
|
|
|
|
-
|
|
|
|
|
|
OPERATING EXPENSES (INCOME)
|
|
|
-
|
|
|
|
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
1,377,008
|
|
Provision for (recovery of) doubtful accounts
|
|
|
(505,061
|
)
|
|
|
85,446
|
|
TOTAL OPERATING EXPENSES
|
|
|
(505,061
|
)
|
|
|
1,462,454
|
|
|
|
|
-
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
505,061
|
|
|
|
1,641,777
|
|
|
|
|
-
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
-
|
|
|
|
-
|
|
Loss on write off of operating and capital assets, and impairment of goodwill
|
|
|
-
|
|
|
|
(18,059,823
|
)
|
|
|
|
-
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
505,061
|
|
|
|
(16,418,045
|
)
|
|
|
|
-
|
|
|
|
|
|
PROVISION FOR INCOME TAXES (TAX BENEFIT)
|
|
|
-
|
|
|
|
(5,985
|
)
|
|
|
|
-
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
505,061
|
|
|
$
|
(16,412,060
|
)
|
Note 19 – Subsequent events
On January 11, 2021, Makesi WFOE entered into a series of assignment
agreements (the “Assignment Agreements”) with Tongrong WFOE, Wuge and Wuge Shareholders, pursuant to which Tongrong
WFOE assign all its rights and obligations under the VIE Agreements to Makesi WFOE (the “Assignment”). The VIE Agreements
and the Assignment Agreements grant Makesi WFOE with the power, rights and obligations equivalent in all material respects to those
it would possess as the sole equity holder of Wuge, including absolute rights to control the management, operations, assets, property
and revenue of Wuge. The Assignment does not have any impact on Company’s consolidated financial statements.
On February 1, 2021, approved by the Board
of Directors and the Compensation Committee of the Company, Mr. Weidong (David) Feng was appointed Co-Chief Executive Officer of
the Company and Dr. Jianing (George) Yu was appointed Chief Operating Officer of the Company, effective February 1, 2021.
On February 11, 2021, Mr. Min Zhu tendered
his resignation as a director, the chairman of the Nominating and Corporate Governance Committee, a member of the Audit Committee
and the Compensation Committee of Code Chain New Continent Limited (the “Company”), effective February 11, 2021. Mr.
Zhu’s resignation was not a result of any disagreement with the Company’s operations, policies or procedures.
CODE CHAIN NEW CONTINENT LIMITED AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On the same day, Ms. Manli Long tendered
her resignation as a director and a member of the Audit Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee of the Company, effective February 11, 2021. Ms. Long’s resignation was not a result of any disagreement
with the Company’s operations, policies or procedures.
On February 11, 2021, approved by the Board
of Directors, the Nominating and Corporate Governance Committee and the Compensation Committee, Mr. Fei Gan was appointed as a
director, the chairman of the Nominating and Corporate Governance Committee, a member of the Audit Committee and the Compensation
Committee of the Company, and Mr. Jin Wang was appointed as a director and a member of the Audit Committee, the Compensation Committee
and the Nominating and Corporate Governance Committee of the Company, effective February 11, 2021.
On February 22, 2021, pursuant to a securities
purchase agreement (the “Purchase Agreement”) with two institutional investors, Code Chain New Continent Limited, a
Nevada company (the “Company”), closed (a) a registered direct offering (the “Registered Direct Offering”)
for the sale of (i) 4,166,666 shares of common stock, par value $0.0001 of the Company (the “Shares”) and (ii) registered
investor warrants, with a term of five years, exercisable immediately upon issuance, to purchase an aggregate of up to 1,639,362
shares of common stock (the “Registered Investor Warrant Shares”) at an exercise price of $6.72 per share, subject
to adjustments thereunder, including a reduction in the exercise price, in the event of a subsequent offering at a price less than
the then current exercise price, to the same price as the price in such offering (a “Price Protection Adjustment”)
(the “Registered Investor Warrants”), and (b) a concurrent private placement (the “Private Placement” and
collectively with the Registered Direct Offering, the “Offering”) for the sale of unregistered investor warrants, with
a term of five and one-half years, first exercisable on the date that is the earlier of (i) six months after the date of issuance
or (ii) the date on which the Company obtains stockholder approval approving the sale of all of the securities offered and sold
under the Purchase Agreement (the “Stockholder Approval”) to purchase an aggregate of up to 2,527,304 shares of common
stock (the “Unregistered Investor Warrant Shares”) at an exercise price of $6.72 per share, subject to adjustments
thereunder, including (x) a Price Protection Adjustment and (y) in the event the exercise price is more than $6.10, a reduction
of the exercise price to $6.10, upon obtaining the Stockholder Approval (the “Unregistered Investor Warrants”). The
Shares, the Registered Investor Warrants, the Unregistered Investor Warrants, the Registered Investor Warrant Shares and the Unregistered
Investor Warrant Shares are collectively referred to as the “Securities.” The Company received gross proceeds from
the sale of the Securities of $24,999,996, before deducting placement agent fees and other Offering expenses. The Company intends
to use the net proceeds from this Offering for working capital and general business purposes.
The Company has evaluated all material
subsequent events that occurred after December 31, 2020 and up through March 26, 2021, and has determined that all events that
require disclosure have been detailed above.