ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the results of our operations and financial condition should be read in conjunction with our unaudited
condensed financial statements, and the notes to those unaudited condensed financial statements that are included elsewhere in this Report.
All monetary figures are presented in U.S. dollars, unless otherwise indicated.
Our
Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking.
Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national,
and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make
and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to
comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and
difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract
and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might
be detailed from time to time in our filings with the Securities and Exchange Commission.
Although
the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on
facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties,
the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are
urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of
the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview
Code
Chain New Continent Limited (formerly known as TMSR Holding Company Limited and JM Global Holding Company, the “Company” or
“CCNC”), through its subsidiaries and controlled entities, focused its business on the research, development and application
of Internet of Things (IoT) and electronic tokens through Wuge Network Games Co., Ltd. (“Wuge”), an entity contractually controlled
by the Company. Prior to March 30, 2021, we were also engaged in 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. On March 30, 2021, the Company entered into a share purchase agreement with a buyer unaffiliated with the Company
(the “Buyer”), and Qihai Wang, former director of the Company (the “Payee”). Pursuant to the agreement, the Company
agreed to sell and the Buyer agreed to purchase all the issued and outstanding ordinary shares (the “Tongrong Shares”) of
Tongrong Technology (Jiangsu) Co., Ltd. (“Tongrong WFOE”), a PRC company and an indirect subsidiary of the Company. The Payee
agreed to be responsible for the payment of the purchase price on behalf of Buyer. On March 31, 2021, the Company closed the sale of the
Tongrong Shares and caused the CCNC Shares to be cancelled. Tongrong WFOE contractually controls Rong Hai. The sale of Tongrong Shares
included disposition of Rong Hai. As a result, as of March 31, 2021, operations of Tongrong WFOE and Rong Hai have been designated as
discontinued operations.
Recent Development
Asset Purchase Agreement
dated February 23, 2021, as amended on April 16, 2021 and May 28, 2021
On
February 23, 2021, the Company entered into an asset purchase agreement with Sichuan RiZhanYun Jisuan Co., Ltd. (the “Seller”),
which was amended and restated on April 16, 2021, and further amended on May 28, 2021. Pursuant to the asset purchase agreement, the Company
purchased a total of 10,000 Bitcoin mining machines (the “Assets”) for a total purchase price of RMB 40,000,000 or US$6,160,000
based on the exchange rate as of April 8, 2021 (the “Purchase Price”), payable in the form of 1,587,800 shares of common stock
of the Company, valued at US$3.88 per share, which is the closing bid price of the common stock of the Company on the Nasdaq Stock Market
on April 8, 2021. The Seller shall cause revenue and any other source of income from the operation of the Assets to be paid to the Company,
payable in cryptocurrency to be deposited into a cryptocurrency wallet held by the Company on a daily basis. The Company shall issue
to the Seller or its designees RMB 5,000,000 or US$770,000 worth of common stock of the Company (the “Bonus Shares”) if the
Assets generate an average net profit per day/10,000 machines (the “Daily Profit”) on behalf of the Company during the one-year
period from March 19, 2021 to March 19, 2022 (the “Valuation Period”) equals to RMB 200,000 or US$30,800 and if the Assets
generate an average net profit per month/10,000 machines (the “Monthly Profit”) on behalf of the Company during the Valuation
Period equals to RMB 6,000,000 or US$924,000. If the Daily Profit is more than RMB 200,000 or US$30,800 and the Monthly Profit is more
than RMB 6,000,000 or US$924,000, the Company shall issue to the Seller or its designees additional shares of common stock in proportion
to the amount that is in excess. If the Daily Profit is less than RMB 200,000 or US$30,800 or the Monthly Profit is less than RMB 6,000,000
or US$924,000, the Company shall not issue to the Seller or its designees any Bonus Shares and such month is deemed a “Re-evaluated
Month”. At the end of the Valuation Period, the Monthly Profit of such Re-evaluated Month(s) shall be aggregated (the “Aggregate
Profit”), and the Company shall issue RMB5,000,000 or US$770,000 worth of common stock of the Company for every RMB6,000,000 or
US$924,000 in Aggregate Profit on a pro rata basis. Such Daily Profit and Monthly Profit shall be determined on a monthly basis on the
first day of the next month. Such Bonus Shares and additional shares, when applicable, shall be issued on the fifteenth day of the next
month. For any month that has 28 days or 31 days, the Monthly Profit is calculated based on the actual number of days in the month.
Notwithstanding the foregoing, no share pursuant to this Agreement shall be issued earlier than May 24, 2021 in any event. The total number
of shares of common stock, including the Bonus Shares, issuable to the Seller or its designees pursuant to the Agreement shall in no event
be more than 19.99% of the total shares issued and outstanding of Company as of the February 23, 2021, the date of the asset purchase
agreement.
On
June 1, 2021, the Company issued to a designee of the Seller 2,513,294 shares of common stock, consisted of (i) the Purchase Price in
the form of 1,587,800 shares of common stock and (ii) 925,494 Bonus Shares, valued at US$2.51 per share, which is the closing bid price
of the common stock of the Company on the Nasdaq Stock Market on May 12, 2021, for meeting and exceeding the Daily Profit and Monthly
Profit benchmark.
Joint Venture Agreement
dated June 1, 2021
On
June 1, 2021, the Company entered into a joint venture agreement with Zhongyou Technology (Shenzhen) Co., Ltd. to jointly establish Zero
Carbon Energy (Shenzhen) Co., Ltd. (the “Joint Venture”), a digital energy carbon neutral innovation platform which uses digital
technology to open up the upstream and downstream of the energy industry chain to achieve carbon neutrality and boost the transformation
and upgrading of the industry and carbon emission reduction. The registered capital of the Joint Venture shall be one million U.S. dollars,
to be contributed by the Company. The Company will hold 51% interest of the Joint Venture.
Asset Purchase Agreement
dated July 28, 2021
On
July 28, 2021, the Company entered into an asset purchase agreement with certain seller pursuant to which the Company purchased from the
seller digital currency mining machines for a total purchase price of RMB 106,388,672.43, or US$ 16,442,109.95 (based on the exchange
rate between RMB and USD of 1: 6.4705 as of July 8, 2021). In exchange, the Company issued 7,647,493 shares of common stock of the Company,
valued at $2.15 per share. The Company plans to use the assets to develop its digital currency mining operation.
Asset Purchase Agreement
dated September 27, 2021
On
September 27, 2021, the Company entered into an asset purchase agreement with Shenzhen Jindeniu Electronics Limited, pursuant to which
the Company agreed to purchase certain storage servers (the “Assets”) for cloud computing, for a total purchase price of US$15,922,303.
The Company plans to use the assets to develop its digital currency mining operation.
Key Factors that Affect
Operating Results
Wuge’s
growth strategy 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.
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.
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.
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 favorable 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.
Coronavirus
(COVID-19) Update
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. In particular, 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 Environmental Protection Technology (Wuhan) Co., Ltd. (“Shengrong
WFOE”), PRC company, and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a PRC company, 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. In addition,
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 fiscal year 2020 and the three quarters of 2021.
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.
Results of Operations
Three Months Ended
September 30, 2021 vs. September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Change
|
|
Revenues –Wuge digital door signs
|
|
$
|
2,665,702
|
|
|
|
-
|
|
|
$
|
2,665,702
|
|
|
|
N/A
|
|
Revenues –Trading and others
|
|
|
|
|
|
|
(45,759
|
)
|
|
|
45,759
|
|
|
|
(100.0
|
)%
|
Total revenues
|
|
|
2,665,702
|
|
|
|
(45,759
|
)
|
|
|
2,711,461
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues –Wuge digital door signs
|
|
|
40,656
|
|
|
|
-
|
|
|
|
40,656
|
|
|
|
N/A
|
|
Cost of Revenues –Trading and others
|
|
|
|
|
|
|
4,711
|
|
|
|
(4,711
|
)
|
|
|
(100.0
|
)%
|
Total cost of revenues
|
|
|
40,656
|
|
|
|
4,711
|
|
|
|
35,945
|
|
|
|
763.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,625,046
|
|
|
|
(50,470
|
)
|
|
|
2,675,516
|
|
|
|
N/A
|
|
Operating expenses
|
|
|
5,852,606
|
|
|
|
(167,450
|
)
|
|
|
6,020,056
|
|
|
|
N/A
|
|
Loss(income) from operations
|
|
|
(3,227,560
|
)
|
|
|
116,980
|
|
|
|
(3,334,540
|
)
|
|
|
N/A
|
|
Other income, net
|
|
|
572,851
|
|
|
|
1,581
|
|
|
|
571,270
|
|
|
|
36133.5
|
%
|
Loss (income) from continuing operations
|
|
|
(2,654,709
|
)
|
|
|
118,561
|
|
|
|
(2,773,270
|
)
|
|
|
N/A
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(459,119
|
)
|
|
|
459,119
|
|
|
|
(100.0
|
)%
|
Gain (loss) on disposal, net of taxes
|
|
|
15,661
|
|
|
|
(151,318
|
)
|
|
|
166,979
|
|
|
|
(110.3
|
)%
|
Loss income
|
|
|
(2,639,048
|
)
|
|
|
(491,876
|
)
|
|
|
(2,147,172
|
)
|
|
|
436.5
|
%
|
Revenues
The
Company’s revenue consists of Wuge digital door signs. Total revenues increased by approximately $2.6 million, to approximately
$2.6 million for the three months ended September 30, 2021, compared to approximately $(45,759) for the three months ended September 30,
2020. The increase was mainly due to the company’s increased effort in promoting the Wuge digital door signs.
Cost of Revenues
The
Company’s cost of revenues consists of cost of Wuge digital door signs. Total cost of revenues increased by approximately $35,945,
to approximately $40,656 for the three months ended September 30, 2021, compared to approximately $4,711 for the same period in 2020.
Our total cost of revenues increase was attributable to the Company’s general increase in revenue for Wuge digital door signs.
Gross Profit
The
Company’s gross profit increased by approximately $2.6 million, to approximately $2.6 million during the three months ended September
30, 2021, from approximately $(50,470) for the three months ended September 30, 2020. The increase was due to the increase in the sales
of Wuge digital door signs.
Operating Expenses
The
Company’s operating expenses include selling, general and administrative (“SG&A”) expenses, and recovery of doubtful
accounts.
SG&
A expenses increased by approximately $6 million from approximately ($0.16) million for the three months ended September 30, 2020 to approximately
$5.8 million for the three months ended September 30, 2021. The increase was mainly due to the increased the listing fee of Wuge digital
door signs.
Loss from Operations
As
a result of the foregoing, loss from operations for the three months ended September 30, 2021 was approximately $3.1 million, an increase
of approximately $3.2 million, or approximately 2762.1%, from approximately $0.1 million for the three months ended September 30, 2020.
The increase was mainly due to increased bonus and the listing fee of Wuge digital door signs.
Net Loss (Income)
The
Company’s net loss decreased by approximately $2.0 million, or 436.5%, to approximately $2.6 million net loss for the three months
ended September 30, 2021, from approximately $0.5 million net loss for the same period in 2020. The decrease was mainly due to increased
bonus and the listing fee of Wuge digital door signs.
Nine Months Ended
September 30, 2021 vs. September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Change
|
|
Revenues –Wuge digital door signs
|
|
$
|
9,541,992
|
|
|
|
-
|
|
|
$
|
9,541,992
|
|
|
|
N/A
|
|
Revenues –Trading and others
|
|
|
|
|
|
|
723
|
|
|
|
(723
|
)
|
|
|
(100.0
|
)%
|
Total revenues
|
|
|
9,541,992
|
|
|
|
723
|
|
|
|
9,541,269
|
|
|
|
1319677.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues –Wuge digital door signs
|
|
|
199,342
|
|
|
|
-
|
|
|
|
199,342
|
|
|
|
N/A
|
|
Cost of Revenues –Trading and others
|
|
|
|
|
|
|
12,323
|
|
|
|
(12,323
|
)
|
|
|
(100.0
|
)%
|
Total cost of revenues
|
|
|
199,342
|
|
|
|
12,323
|
|
|
|
187,019
|
|
|
|
1517.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,342,650
|
|
|
|
(11,600
|
)
|
|
|
9,354,250
|
|
|
|
N/A
|
|
Operating expenses
|
|
|
32,748,873
|
|
|
|
752,314
|
|
|
|
31,996,559
|
|
|
|
4253.1
|
%
|
Loss from operations
|
|
|
(23,406,223
|
)
|
|
|
(763,914
|
)
|
|
|
(22,642,309
|
)
|
|
|
2964.0
|
%
|
Other income, net
|
|
|
2,408,656
|
|
|
|
5,934
|
|
|
|
2,402,722
|
|
|
|
40490.8
|
%
|
Loss from continuing operations
|
|
|
(20,997,567
|
)
|
|
|
(757,980
|
)
|
|
|
(20,239,587
|
)
|
|
|
2670.2
|
%
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
23,571
|
|
|
|
424,774
|
|
|
|
(401,203
|
)
|
|
|
94.5
|
%
|
Loss (gain) on disposal, net of taxes
|
|
|
(11,218,835
|
)
|
|
|
6,800,299
|
|
|
|
(18,019,134
|
)
|
|
|
(265.0
|
)%
|
Net (loss) income
|
|
|
(32,192,831
|
)
|
|
|
6,467,093
|
|
|
|
(38,659,924
|
)
|
|
|
N/A
|
|
Revenues
The
Company’s revenue consists of Wuge digital door signs. Total revenues increased by approximately $9.5 million, to approximately
$9.5 million for the nine months ended September 30, 2021, compared to approximately $0 million for the nine months ended September 30,
2020. The increase was mainly due to the company’s increased effort in promoting the Wuge digital door signs.
Cost of Revenues
The
Company’s cost of revenues consists of cost of Wuge digital door signs. Total cost of revenues increased by approximately $0.2 million,
to approximately $0.2 million for the nine months ended September 30, 2021, compared to approximately $0 million for the same period in
2020. Our total cost of revenues increase was attributable to the Company’s general increase in revenue for Wuge digital door signs.
Gross Profit
The
Company’s gross profit increased by approximately $9.3million, to approximately $9.3 million during the nine months ended September
30, 2021, from approximately $0 million for the nine months ended September 30, 2020. The increase was due to the increase in the sales
of Wuge digital door signs.
Operating Expenses
The
Company’s operating expenses include selling, general and administrative (“SG&A”) expenses, and recovery of doubtful
accounts.
SG&
A expenses increased by approximately $32 million, by approximately 4253.1 %, from approximately $0.8 million for the nine months ended
September 30, 2020 to approximately $32.7 million for the nine months ended September 30, 2021. The increase was mainly due to increased
employee compensation.
Loss from Operations
As
a result of the foregoing, loss from operations for the nine months ended September 30, 2021 was approximately $23.4 million, an increase
of approximately $22.6 million, or approximately 2964 %, from approximately $0.8 million for the nine months ended September 30, 2020.
The increase was mainly due to increased employee compensation.
Net Loss (Income)
The
Company’s net loss increased by approximately $38.7 million, or 597.0%, to approximately $32.2 million net loss for the nine months
ended September 30, 2021, from approximately $6.5 million net loss for the same period in 2020. The increase was mainly due to the disposal
of certain subsidiaries and employee compensation.
Critical Accounting
Policies and Estimates
The
preparation of the unaudited condensed financial statements in conformity with accounting principles generally accepted in the United
States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto,
and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant
to the preparation of our unaudited condensed consolidated financial statements. These accounting policies are important for an understanding
of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of
our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as
a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility
that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and judgments used in the preparation of our unaudited condensed consolidated
financial statements.
Cash and cash equivalents
The
Company considers certain short-term, highly liquid investments with an original maturity of three months or less, when purchased, to
be cash equivalents. Cash and cash equivalents primarily represent bank deposits and fixed deposits with maturities of less than three
months.
Investments
The
Company purchases certain liquid short term investments such as money market funds and or other short term debt securities marketed by
large financial institutions. These investments are not insured against loss of principal. These investments are accounted for as financial
instruments that are marked to fair market value at the end of each reporting period. As result of their short maturities, and limited
risk profile, at times, their amortized carrying cost may be the best approximation their fair value.
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, work in progress and finished goods and are stated at the lower of cost or net realizable value using
the weighted average method in Rong Hai. Management reviews inventories for obsolescence and cost in excess of net realizable value at
least annually and records a reserve against the inventory when the carrying value exceeds net realizable value.
Prepayments
Prepayments
are funds deposited or advanced to outside vendors for future inventory purchases. As a standard practice in China, many of the Company’s
vendors require a certain amount to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis.
This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require any outstanding
prepayments to be returned to the Company when the contract ends.
Fair value measurement
The
accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and
requires disclosure of the fair value of financial instruments held by us. The Company considers the carrying amount of cash, notes receivable,
accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities, customer deposits, short
term loans and taxes payable to approximate their fair values because of their short term nature.
The
accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance
disclosure requirements for fair value measures. The three levels are defined as follow:
|
●
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
●
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
Financial
instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost,
which approximate fair value because of the short period of time between the origination of such instruments and their expected realization
and their current market rates of interest.
Revenue recognition
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 warranty revenues, was recognized based
on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the
Company’s warranty revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.
The
core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and
services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This
will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point
in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are primarily
recognized at a point in time except for the warranty revenues where the warranty periods are recognized over the warranty period, usually
is a period of twelve months.
The
ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company
(i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction
price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate
the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies
the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result
in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy
for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and
confirmed that there were no differences in the pattern of revenue recognition except its warranty revenues.
An
entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order to determine
if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls the goods or services
provided, will result in the recognition of the gross amount of consideration expected in the exchange. Agent arrangements, where the
entity simply arranges but does not control the goods or services being transferred to the customer, will result in the recognition of
the net amount the entity is entitled to retain in the exchange.
Revenue
from equipment and systems, revenue from coating and fuel materials, and revenue from trading and others are recognized at the date of
goods delivered and title passed to customers, when a formal arrangement exists, the price is fixed or determinable, the Company has no
other significant obligations and collectability is reasonably assured. Such revenues are recognized at a point in time after all performance
obligations are satisfied under the new five-step model. In addition, training service revenues are recognized when the services are rendered
and the Company has no other obligations, and collectability is reasonably assured. These revenues are recognized at a point in time.
Prior
to January 1, 2018, the Company allowed its customers to retain 5% to 10% of the contract price as retainage during the warranty period
of 12 months to guarantee product quality. Retainage is considered as a payment term included as a part of the contract price, and was
recognized as revenue upon the shipment of products. Due to nature of the retainage, the Company’s policy is to record revenue the
full value of the contract without VAT, including any retainage, since the Company has experienced insignificant warranty claims historically.
Due to the infrequent and insignificant amount of warranty claims, the ability to collect retainage was reasonably assured and was recognized
at the time of shipment. On January 1, 2018, upon the adoption of ASU 2014-09 (ASC 606), revenues from product warranty are recognized
over the warranty period over 12 months.
Payments
received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
Gross versus Net Revenue
Reporting
Starting
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.
Recently Issue 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. We do not believe the adoption of this ASU would have a material effect on our consolidated financial statements.
We
do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on
our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
Liquidity and Capital
Resources
The
Company has funded working capital and other capital requirements primarily by equity contributions, loans from shareholders, cash flow
from operations, short term bank loans, loans from third parties and cash received from JM Global Holding Company through the reverse
capitalization. Cash is required to repay debts and pay salaries, office expenses, income taxes and other operating expenses. As of September
30, 2021, our net working capital was approximately $19.5 million, over 4% of the Company’s current liabilities was from other payables
– related parties due to major shareholders. Removing these liabilities, the Company had net working capital of $20.0 million and
is expected to continue to generate cash flow from operations in the twelve months period.
We
believe that current levels of cash and cash flows from operations will be sufficient to meet its anticipated cash needs for at least
the next twelve months from the date the consolidated financial statements to be issued. However, it may need additional cash resources
in the future if it experiences changed business conditions or other developments, and may also need additional cash resources in the
future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined
that the cash requirements exceed the Company’s amounts of cash and cash equivalents on hand, the Company may seek to issue debt
or equity securities or obtain additional credit facility.
The
following summarizes the key components of the Company’s cash flows for the nine months ended September 30, 2021 and 2020.
|
|
For the
Nine Months ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(14,598,852
|
)
|
|
$
|
551,053
|
|
Net cash used in investing activities
|
|
|
(95,241
|
)
|
|
|
(4,469,279
|
)
|
Net cash provided by financing activities
|
|
|
22,795,019
|
|
|
|
2,954,983
|
|
Effect of exchange rate change on cash
|
|
|
(25,129
|
)
|
|
|
(56,922
|
)
|
Net change in cash
|
|
$
|
8,075,796
|
|
|
$
|
(1,020,165
|
)
|
As
of September 30, 2021 and December 31, 2020, the Company had cash in the amount of $8,383,906 and $998,717, respectively. As of September
30, 2021 and December 31, 2020, $7,220,994 and $998,717 and were deposited with various financial institutions located in the PRC, respectively.
As of September 30, 2021 and December 31, 2020, $1,162,912 and $0 were deposited with one financial institution located in the United
States, respectively.
Operating activities
Net
cash used in operating activities was approximately $14.6 million for the nine months ended September 30, 2021, as compared to approximately
$0.5 million net cash provided by operating activities for the nine months ended September 30, 2020. Net cash provided by operating activities
was mainly due to the decrease of approximately $0.4 million other receivables, the increase of approximately $21.2 million of prepayments,
and the increase of approximately $10.1 million of customer deposits, and the decrease of approximately $0.3 million of taxes payable.
Investing activities
Net
cash used in investing activities was approximately $1 million for the nine months ended September 30, 2021, as compared to approximately
$4.5 million net cash used in investing activities for the nine months ended September 30, 2020. Net cash used in investing activities
for the nine months ended September 30, 2021 was due to approximately $0.3 million spending on purchase of equipment and $0.3 million
by disposal of discontinued operations.
Financing activities
Net
cash provided by financing activities was approximately $22.8 million for the nine months ended September 30, 2021, as compared to approximately
$3.0 million net cash used in financing activities for the nine months ended September 30, 2020. Net cash provided by financing activities
for the nine months ended September 30, 2021 was due to approximately $0.3 million proceeds from short-term loans – bank and $22.5
million proceeds from issuance of common stock.