GD Culture Group(GDC) - 2021 Q4 - Annual Report

PART I Business The company operates as a Nevada-based holding entity, conducting its primary IoT business through a Chinese Variable Interest Entity, Wuge, a structure with inherent legal risks General Business and Corporate Structure CCNC operates as a holding company, conducting its IoT and digital door sign business through a PRC-based VIE, Wuge, controlled by contractual arrangements - The company's primary business, conducted through its VIE Wuge, focuses on IoT and digital door signs, accessible via the 'Wuge Social' mobile application[9][10] - CCNC operates as a holding company with no material operations, relying on VIE agreements with Wuge, a structure explicitly warned to carry unique, untested legal risks that could render securities worthless[8] - Control over Wuge is established through contractual arrangements assigned to its subsidiary Makesi WFOE, including Technical Consultation and Services, Equity Pledge, Equity Option, and Voting Rights Proxy Agreements[30][32][33] Corporate History and Dispositions The company transformed from a blank check entity to an IoT focus, marked by the Wuge acquisition and strategic divestitures of non-core assets - On March 30, 2021, the company sold Tongrong WFOE, which held VIE agreements for the coal and materials wholesale business, designating these operations as discontinued[11][25] - The company acquired control of Wuge in January 2020 via VIE agreements, issuing 4,000,000 shares of common stock, shifting its focus to IoT and blockchain-related e-commerce[21] - In June 2020, the company disposed of its China Sunlong subsidiaries, engaged in the coating material business, citing catastrophic economic disruption from the COVID-19 pandemic[23][26] Regulatory Developments and HFCAA Implications The company navigates complex U.S. and Chinese regulations, believing its U.S.-based, PCAOB-inspected auditor mitigates immediate HFCAA risks, despite uncertainties in PRC overseas listing rules - The company's auditor, WWC, P.C., is U.S.-based and subject to regular PCAOB inspection, mitigating immediate risk under the HFCAA[43] - The company believes it is not currently required to obtain CSRC or CAC permission for its U.S. listing, but acknowledges future rules could impose new filing requirements[39][40] - Management believes Wuge is not a "network platform operator" with over one million users' personal information, thus not currently subject to China's cybersecurity review, though the definition remains unclear[35][36] Condensed Consolidated Financial Data Condensed financial data reveals complete reliance on the VIE for revenue, a significant consolidated net loss in 2021, and substantial growth in total consolidated assets Condensed Consolidated Statements of Income (Loss) (USD) | | CCNC (Parent) | Subsidiaries | VIE | Eliminations | Consolidated Total | |:---|---:|---:|---:|---:|---:| | For the Year Ended Dec 31, 2021 | | | | | | | Revenue | - | - | 25,029,949 | - | 25,029,949 | | Net income (loss) | (24,721,486) | - | 3,721,527 | (5,970,933) | (26,970,892) | | For the Year Ended Dec 31, 2020 | | | | | | | Revenue | - | - | 591,455 | - | 591,455 | | Net income (loss) | (1,445,522) | - | (158,591) | 4,114,569 | 2,510,456 | Condensed Consolidated Balance Sheets (USD) | | CCNC (Parent) | Subsidiaries | VIE | Eliminations | Consolidated Total | |:---|---:|---:|---:|---:|---:| | As of Dec 31, 2021 | | | | | | | Total assets | 51,739,299 | - | 19,367,508 | (20,571,550) | 50,535,257 | | Total liabilities | 5,471,427 | - | 15,833,781 | (2,849,942) | 18,455,266 | | Total shareholders' equity | 46,267,872 | - | 3,533,727 | (17,721,608) | 32,079,991 | | As of Dec 31, 2020 | | | | | | | Total assets | 35,187,552 | - | 2,304,566 | (12,356,999) | 25,135,119 | | Total liabilities | 2,046,099 | - | 2,521,501 | (1,345,236) | 3,222,364 | | Total shareholders' equity | 33,141,453 | - | (216,935) | (11,011,763) | 21,912,755 | - No cash or asset transfers occurred between the parent, subsidiaries, and VIE in 2021, though approximately $1.23 million was transferred from Tongrong to the VIE in 2020 as working capital[51][52] Recent Business Developments The company actively engaged in capital raising, securing $25.0 million, and pursued strategic acquisitions of Bitcoin mining machines, though some subsequent agreements were terminated - In February 2021, the company raised gross proceeds of $25.0 million through a registered direct offering and private placement[60][61] - The company agreed in February 2021 to purchase 10,000 Bitcoin mining machines for approximately $6.16 million, paid with 1,587,800 shares of common stock and potential bonus shares[66] - Asset purchase agreements from July and September 2021 for digital currency mining machines and cloud computing servers were both terminated in early 2022, with considerations returned[69][70] Risk Factors The company faces substantial risks from its VIE structure, evolving PRC regulations, potential HFCAA delisting, and the limited operating history of its core Wuge business - A primary risk is that VIE agreements, providing control over Wuge, are not as effective as direct ownership and remain untested in PRC courts, potentially leading to invalidation and worthless stock[97][99][100] - The Chinese government's substantial influence and evolving regulations on securities, data, and overseas listings create significant uncertainty, potentially hindering the company's ability to offer securities or maintain its U.S. listing[142][144][147] - The HFCAA poses a delisting risk if the PCAOB cannot inspect the company's auditor for two consecutive years, a significant risk despite the current auditor's compliance[178][180][189] - Wuge, the company's main business, has a limited operating history since commencing its digital door sign business in March 2021, complicating future performance evaluation[201] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties The company's operational property is a leased office for Wuge in Chengdu, Sichuan, China, considered adequate for current operations - Wuge's office is located at 119 Zhaojuesi South Road, Room 2-1, Chengdu, Sichuan, China, with an annual rent of approximately RMB 400,000[226] Legal Proceedings The company, its subsidiaries, and its VIE are not currently parties to any material legal proceedings - To management's knowledge, no litigation is currently pending or contemplated against the company, its officers, or its property[227] Mine Safety Disclosures This item is not applicable to the company's current business operations - Not applicable PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock and warrants trade on Nasdaq and OTC, with no cash dividends planned, and an Equity Incentive Plan authorizing up to 3,000,000 shares - The company's common stock is traded on the Nasdaq Capital Market under the symbol "CCNC"[230] - The company has not paid and does not plan to pay cash dividends, intending to retain earnings for operations and growth[231] - The 2019 Equity Incentive Plan authorizes a maximum of 3,000,000 shares of common stock for awards to employees, directors, and consultants[231][235] Reserved This item is reserved and contains no information - None Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2021 saw a dramatic shift to Wuge's digital door sign business, generating $25.0 million in revenue but resulting in a $27.0 million net loss due to increased operating expenses, despite improved liquidity from financing activities Results of Operations Comparison (USD in millions) | | 2021 | 2020 | Change (%) | |:---|---:|---:|---:| | Total revenues | 25.0 | 0.6 | 4131.9% | | Gross profit | 8.3 | 0.6 | 1346.3% | | Operating expenses | 22.9 | 1.1 | 2045.5% | | Loss from operations | (14.6) | (0.5) | 2848.3% | | Net (loss) income | (27.0) | 2.5 | (1174.3)% | - Revenue for the year ended December 31, 2021, was approximately $25.0 million, entirely from the new Wuge digital door signs business[279] - Operating expenses surged to $22.9 million in 2021 from $0.7 million in 2020, primarily due to increased employee compensation[283] Cash Flow Summary (USD in millions) | | 2021 | 2020 | |:---|---:|---:| | Net cash used in operating activities | (5.5) | (0.002) | | Net cash used in investing activities | (1.3) | (4.5) | | Net cash provided by financing activities | 22.8 | 3.1 | Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide this disclosure - Disclosure is not required for a smaller reporting company[319] Financial Statements and Supplementary Data This section references the full consolidated financial statements and the independent registered public accounting firm's report, located from page F-1 to F-31 - This item references the detailed financial statements located on pages F-1 through F-31 of the annual report[319] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, practices, or financial statement disclosure - None Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2021, due to material weaknesses in U.S. GAAP expertise and training, with remediation plans underway - Management concluded that disclosure controls and procedures were not effective as of the end of the reporting period[320] - Two material weaknesses were identified: inadequate U.S. GAAP expertise among accounting staff and no formal training plan for U.S. GAAP and internal controls[324][325] - Management's remediation plan includes engaging outside consultants and implementing a training program for accounting staff[327] Other Information The company reports no other information for this item - None Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable PART III Directors, Executive Officers and Corporate Governance The company's leadership includes CEO Wei Xu and CFO Yi Li, with an eight-member board, a majority of whom are independent and serve on three standing committees Executive Officers and Directors | Name | Age | Position | |:---|---:|:---| | Wei Xu | 59 | Chief Executive Officer, President, and Chairman of the Board | | Yi Li | 44 | Chief Financial Officer and Secretary | | Jianan Liang | 46 | Chief Operating Officer | | Bibo Lin | 38 | Vice President and Director | | Mingyue Cai | 43 | Director, Chairman of the Compensation Committee | | Chengwei Mo | 47 | Director, Chairman of the Audit Committee | | Siyang Hu | 39 | Director | | Fei Gan | 41 | Director, Chairman of the Nominating and Corporate Governance Committee | - The board has determined that Mingyue Cai, Chengwei Mo, Fei Gan, and Siyang Hu are independent directors as defined by Nasdaq listing standards[343] - The board has an Audit Committee, a Compensation Committee, and a Corporate Governance and Nominating Committee, each with specified members and chairpersons[346][348][350] Executive Compensation Executive compensation for fiscal year 2021 was modest, with CEO Wei Xu receiving $10,000, and no stock awards granted to officers or directors 2021 Summary Compensation Table (Named Executive Officers) | Name and Principal Position | Salary ($) | |:---|---:| | Wei Xu (CEO, President and Chairman) | 10,000 | | Yimin Jin (Former CEO) | 66,667 | | Weidong (David) Feng (Former CEO) | 33,333 | | Tingjun Yang (Former CEO) | 18,750 | | Yi Li (CFO) | 30,000 | | Jianan Liang (COO) | 23,750 | | Bibo Lin (Vice President and director) | 10,000 | 2021 Director Compensation | Name | Fees earned in cash ($) | |:---|---:| | Qihai Wang | 2,500 | | Yajing Li | 2,500 | | Mingyue Cai | 10,000 | | Chengwei Mo | 7,500 | | Siyang Hu | 3,333 | | Fei Gan | 8,750 | | Jin Wang | 5,833 | - No stock or option awards were granted to officers and directors during the fiscal year ended December 31, 2021[358] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 31, 2022, directors and executive officers collectively owned 13.38% of common stock, with CEO Wei Xu and former CEO Yimin Jin holding significant stakes under a Voting-in-Concert Agreement Security Ownership of Beneficial Owners (as of March 31, 2022) | Name of Beneficial Owner | Amount of Beneficial Ownership | Percent of Class | |:---|---:|---:| | Directors and Named Executive Officers | | | | Wei Xu (CEO, President & Chairman) | 3,940,184 | 10.25% | | Bibo Lin (VP & Director) | 1,200,000 | 3.12% | | All officers and directors as a group (8 persons) | 5,140,184 | 13.38% | | 5% Beneficial Owners | | | | Yimin Jin | 4,334,705 | 11.28% | | Hong Kong Kisen Co., Limited | 2,300,000 | 5.98% | - CEO Wei Xu and former CEO Yimin Jin have a Voting-in-Concert Agreement dated July 26, 2021, with a one-year term[366] Certain Relationships and Related Transactions, and Director Independence The company engaged in related party transactions involving non-interest-bearing advances and loans, with outstanding receivables and payables, and has determined four directors are independent Other Receivable – Related Party (as of Dec 31, 2021) | Name of related party | Relationship | Amount (USD) | |:---|:---|---:| | Chengdu Yuan Code Chain Technology Co. Ltd | Controlled by former shareholder | 513,387 | | Marchain (Shanghai) Network Technology Co., LTD | Controlled by shareholder | 78,423 | | Chenghua District Code To Code To Commerce And Trade Department | Controlled by employee | 19,138 | | Total | | 610,948 | Other Payables – Related Parties (as of Dec 31, 2021) | Name of related party | Relationship | Amount (USD) | |:---|:---|---:| | Chuanliu Ni | CEO and director of a former subsidiary | 325,907 | | Zhong Hui Holding Limited | Shareholder of the Company | 140,500 | | Total | | 466,407 | - The board has determined that Mr. Chengwei Mo, Mr. Siyang Hu, Mr. Mingyue Cai, and Mr. Fei Gan are "independent directors" as defined by Nasdaq listing standards[371] Principal Accountant Fees and Services The company's independent registered public accounting firm, WWC, P.C., charged $225,000 in audit fees annually for 2021 and 2020, with additional tax services in 2021, all pre-approved Accountant Fees (USD) | Fee Category | 2021 | 2020 | |:---|---:|---:| | Audit Fees | 225,000 | 225,000 | | Audit-Related Fees | 0 | 0 | | Tax Fees | 5,000 | 0 | | All Other Fees | 0 | 0 | PART IV Exhibits, Financial Statement Schedules This section lists all Form 10-K exhibits, including corporate governance documents, material contracts, and certifications, with all financial statement schedules omitted - The report includes a comprehensive list of exhibits, such as Articles of Incorporation, Bylaws, warrant forms, employment agreements, VIE-related agreements, asset purchase agreements, and required CEO/CFO certifications[376][377][378] - All financial statement schedules have been omitted as they are not applicable, immaterial, or the information is already present in the financial statements and notes[374]