UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
| 10019 | ||
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including
area code:
Not applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Date File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
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
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 14, 2024, there were
TABLE OF CONTENTS
| Page | ||
| PART I. | FINANCIAL INFORMATION | 1 |
| ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) | 1 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 31 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 40 |
| ITEM 4. | CONTROLS AND PROCEDURES | 41 |
| PART II. | OTHER INFORMATION | 42 |
| ITEM 1. | LEGAL PROCEEDINGS | 42 |
| ITEM 1A. | RISK FACTORS | 42 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 42 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 42 |
| ITEM 4. | MINE SAFETY DISCLOSURES | 42 |
| ITEM 5. | OTHER INFORMATION | 42 |
| ITEM 6. | EXHIBITS | 42 |
i
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q include, without limitation, statements relating to:
| ● | our goals and strategies; |
| ● | our future business development, results of operations and financial condition; |
| ● | our estimates regarding expenses, future revenues, capital requirements and our need for additional financing; |
| ● | our estimates regarding the market opportunity for our services; |
| ● | the impact of government laws and regulations; |
| ● | our ability to recruit and retain qualified personnel; |
| ● | our failure to comply with regulatory guidelines; |
| ● | uncertainty in industry demand; |
| ● | general economic conditions and market conditions in the financial services industry; |
| ● | future sales of large blocks or our securities, which may adversely impact our share price; and |
| ● | depth of the trading market in our securities. |
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” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and elsewhere in this Quarterly Report on Form 10-Q.
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 Quarterly Report on Form 10-Q, to conform these statements to actual results or to changes in our expectations.
ii
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
UNAUDITED INTERIM consolidated financial statements AND SUPPLEMENTARY DATA
Index to unaudited interim consolidated financial statements
1
GD CULTURE GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Loan receivable | ||||||||
| Other receivables, net | ||||||||
| Convertible notes receivable | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| EQUIPMENT, NET | ||||||||
| RIGHT-OF-USE ASSETS, NET | ||||||||
| OTHER ASSETS | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Other payables and accrued liabilities | $ | $ | ||||||
| Other payables - related parties | ||||||||
| Lease liabilities - current | ||||||||
| Total current liabilities | ||||||||
| OTHER LIABILITIES | ||||||||
| Lease liabilities – non-current | ||||||||
| Deferred tax liabilities | ||||||||
| Total other liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total GD Culture Group Limited shareholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
2
GD CULTURE GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
| For the Three Months ended September 30, | For the Nine Months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| REVENUES | ||||||||||||||||
| Software copyright | $ | $ | $ | $ | ||||||||||||
| TOTAL REVENUES | ||||||||||||||||
| COST OF REVENUES | ||||||||||||||||
| Software copyright | ||||||||||||||||
| TOTAL COST OF REVENUES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other-than-temporary impairment losses | ( | ) | ( | ) | ||||||||||||
| Gain from disposal of subsidiaries | ||||||||||||||||
| TOTAL OTHER INCOME (EXPENSE) | ( | ) | ( | ) | ||||||||||||
| LOSS BEFORE INCOME TAXES FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LESS: INCOME TAX BENEFIT | ( | ) | ( | ) | ||||||||||||
| LOSS FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss from continuing operations attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss from continuing operations attributable to shareholders of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Discontinued operations: | ||||||||||||||||
| Loss on disposal, net of taxes | ( | ) | ( | ) | ||||||||||||
| Loss from discontinued operations, net of taxes | ( | ) | ( | ) | ||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to shareholders of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| - Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| - Fair value changes of convertible note receivables | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE LOSS, net of tax | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Comprehensive loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to shareholders of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON STOCKS | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
| Loss per share from continuing operations | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share from discontinued operations | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share available to common shareholders | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
3
GD CULTURE GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
For the three and nine months ended September 30, 2024
| Additional | Accumulated Other | Total GD Culture Group Limited | Non | Total | ||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Shareholders’ | controlling | Shareholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock for Cash | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisition of | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Exercise of pre-funded warrants | ||||||||||||||||||||||||||||||||||||||||
| Exercise of November 2023 Registered Warrants | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Fair value changes of convertible notes receivable | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock for acquisition of copyright | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Fair value changes of convertible notes receivable | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Exercise of pre-funded warrants | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Exercise of February 2021 Registered Warrants | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair value changes of convertible notes receivable | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
4
GD CULTURE GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
For the three and nine months ended September 30, 2023
| Additional | Stock | Accumulated Deficit | Accumulated Other | Total GD Culture Group Limited | Non- | Total | ||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Subscription | Statutory | Comprehensive | Shareholders’ | Controlling | Shareholders’ | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivable | Reserves | Unrestricted | Income | Equity | Interest | Equity | |||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| The cancellation of the common stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for Cash | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisition right, title, and interest in and to the certain software copyright | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Contribution by noncontrolling interest shareholder | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock subscription receivable from issuance of common stock | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
5
GD CULTURE GROUP LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation of equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Lease expenses of right-of-use assets | ||||||||
| Disposal of the company | ||||||||
| Goodwill impairments | ||||||||
| Other-than-temporary impairment losses from convertible note | ||||||||
| Other-than-temporary impairment losses from intangible assets | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other receivables | ( | ) | ( | ) | ||||
| Prepaid expense - related party | ( | ) | ||||||
| Prepaid and other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Other payables and accrued liabilities | ( | ) | ||||||
| Customer deposits | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Taxes payable | ( | ) | ||||||
| Other payables - related party | ( | ) | ||||||
| Deferred tax liability | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of intangible assets | ( | ) | ||||||
| Purchase of equipment | ( | ) | ||||||
| Purchase of convertible notes | ( | ) | ||||||
| Loan to a third party | ( | ) | ||||||
| Repayment of loan to a third party | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Contribution by noncontrolling shareholder | ||||||||
| Proceeds from exercise of pre-funded warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for income tax | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES | ||||||||
| Issuance of common stock for acquisition right, title, and interest in and to the certain software | $ | $ | ||||||
| The cancellation of the common stock | $ | $ | ||||||
| Initial recognition of right-of-use assets and lease liability | $ | $ | ||||||
| Issuance of common stock for | $ | $ | ||||||
| Exercise of November 2023 Registered Warrants | $ | $ | ||||||
| Exercise of pre-funded warrants pursuant to the Warrant Exchange Agreements | $ | $ | ||||||
| Exercise of February 2021 Registered Warrants | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
6
GD CULTURE GROUP LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Business and Organization
GD Culture Group Limited (“GDC” or the “Company”), formerly known as Code Chain New Continent Limited, TMSR Holding Company Limited and JM Global Holding Company, is a Nevada corporation and a holding company. The Company currently conducts its operations on virtual content production (the “Virtual Content Production”) through the Company and two subsidiaries, AI Catalysis corp. (“AI Catalysis”) and Shanghai Xianzhui Technology Co., Ltd. (“SH Xianzhui”). The Company focuses its business mainly on: 1) AI-driven digital human creation and customization; 2) Live streaming and e-commerce, and, 3) Live Streaming Interactive Game. The Company has relentlessly been focusing on serving its customers and creating value for them through the continual innovation and optimization of its products and services. Currently, the Company’s subsidiaries, Citi Profit Investment Holding Limited (“Citi Profit BVI”), Highlights Culture Holding Co., Limited (“Highlight HK”), Shanghai Highlight Entertainment Co., Ltd. (“Highlight WFOE”) are holding companies with no material operations.
SH Xianzhui was incorporated by Highlight
WFOE and other two shareholders on August 10, 2023. SH Xianzhui is principally engaged in the provision of social media marketing agency
service. Highlight WFOE initially owns
AI Catalysis is a Nevada corporation, incorporated on May 18, 2023. AI Catalysis is expected to bridge the realms of the internet, media, and artificial intelligence (“AI”) technologies. Positioned at the crossroads of traditional and streaming media, AI Catalysis plans to elevate the experience of media with AI-based interactive and smart content, aiming to transform the whole media landscape. At present, AI Catalysis primarily focused on the application of AI digital human technology with the sectors of e-commerce and entertainment to improve the interaction experiences online. AI Catalysis strives to deliver stable interactive livestreaming products to AI Catalysis’ users. AI Catalysis foresees future expansion to a variety of business sectors with AI applications in different scenarios. AI Catalysis plans to enter into the livestreaming market with a focus on e-commerce and livestreaming interactive game.
Prior to June 26, 2023, the Company had a subsidiary
TMSR Holdings Limited (“TMSR HK”), which owns
Prior to September 26, 2023, the Company also conducted business through Shanghai Highlight Media Co., Ltd. (“Highlight Media”). Highlight WFOE had a series of contractual arrangement with Highlight Media. For accounting purposes, Highlight WFOE was the primary beneficiary of Highlight Media. Accordingly, under U.S. GAAP, GDC treated Highlight Media as the consolidated affiliated entity and has consolidated Highlight Media’s financial results in GDC’s financial statements prior to September 26, 2023. Highlight Media was an integrated marketing service agency, focusing on enterprise brand management, crisis public relations, intelligent public opinion monitoring, media PR, financial and economic we-media operation, digital face application, large-scale exhibition services and other businesses. On September 26, 2023, Highlight WFOE entered into a termination agreement with Highlight Media and the shareholders of Highlight Media to terminate the VIE Agreements and sold the interest in the VIE Agreements. As a result of such termination, the Company no longer treats Highlight Media as a consolidated affiliated entity or consolidates the financial results and balance sheet of Highlight Media in the Company’s unaudited interim consolidated financial statements.
7
| Name | Background | Ownership | |||
| Citi Profit BVI | ● | ||||
| TMSR HK | ● | ||||
| ● | |||||
| ● | |||||
| Highlight HK | ● | ||||
| ● | |||||
| Makesi WFOE | ● | ||||
| ● | |||||
| ● | |||||
| Highlight WFOE | ● | ||||
| ● | |||||
| Yuanma | ● | ||||
| ● | |||||
| ● | |||||
| Highlight Media | ● | ||||
| ● | |||||
| ● | |||||
| AI Catalysis | ● | ||||
| ● | |||||
| SH Xianzhui | ● | ||||
| ● |
Contractual Arrangements
Yuanma and Highlight Media were 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 VIE agreements with Yuanma are described below. The Company disposed TMSR HK, Makesi WFOE and Yuanma on June 26, 2023.
Technical Consultation and Services Agreement.
Pursuant to the technical consultation and services agreement between Makesi WFOE and Yuanma dated June 21, 2022, Makesi WFOE has the exclusive right to provide consultation services to Yuanma relating to Yuanma’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 Yuanma’s actual operation on a quarterly basis. This agreement will be effective for 20 years and can be extended by Makesi WFOE unilaterally by prior written notice to the other parties. Makesi WFOE may terminate this agreement at any time by giving a 30 days’ prior written notice to Yuanma. If any party breaches the agreement and fails to cure within 30 days from the written notice from the non-breach party, the non-breach party may (i) terminate the agreement and request the breaching party to compensate the non-breaching party’s loss or (ii) request special performance by the breaching party and the breaching party to compensate the non-breaching party’s loss.
Equity Pledge Agreement.
Under the equity pledge agreement among Makesi WFOE, Yuanma and Yuanma Shareholders dated June 21, 2022, Yuanma Shareholders pledged all of their equity interests in Yuanma to Makesi WFOE to guarantee Yuanma’s performance of relevant obligations and indebtedness under the technical consultation and services agreement. In addition, Yuanma Shareholders will complete the registration of the equity pledge under the agreement with the competent local authority. If Yuanma 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 Yuanma Shareholders cease to be shareholders of Yuanma.
8
Equity Option Agreement.
Under the equity option agreement among Makesi WFOE, Yuanma and Yuanma Shareholders dated June 21, 2022, each of Yuanma 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 Yuanma. Also, Makesi WFOE or its designee has the right to acquire any and all of its assets of Yuanma. Without Makesi WFOE’s prior written consent, Yuanma’s shareholders cannot transfer their equity interests in Yuanma and Yuanma 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, Yuanma and Yuanma Shareholders dated June 21, 2022, each Yuanma 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 Yuanma, including but not limited to the power to vote on its behalf on all matters of Yuanma requiring shareholder
approval in accordance with the articles of association of Yuanma. The proxy agreement is for a term of
On June 26, 2023, the Company sold all the issued and outstanding equity interest in TMSR HK.
Material terms of each of the VIE agreements with Highlight Media are described below. The VIE agreements with Highlight Media were terminated and the Company disposed Highlight Media as of September 26, 2023.
Technical Consultation and Services Agreement.
Pursuant to the technical consultation and services agreement between Highlight Media and Makesi WFOE dated September 16, 2022, Makesi WFOE has the exclusive right to provide consultation services to Highlight Media relating to Highlight Media’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 Highlight Media’s actual operation on a quarterly basis. This agreement will be effective as long as Highlight Media exists. Makesi WFOE may terminate this agreement at any time by giving a 30 days’ prior written notice to Highlight Media.
Equity Pledge Agreement.
Under the equity pledge agreement among Makesi WFOE, Highlight Media and the shareholders of Highlight Media dated September 16, 2022, the shareholders of Highlight Media pledged all of their equity interests in Highlight Media to Makesi WFOE to guarantee Highlight Media’s performance of relevant obligations and indebtedness under the technical consultation and services agreement. In addition, the shareholders of Highlight Media will complete the registration of the equity pledge under the agreement with the competent local authority. If Highlight Media 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 shareholders of Highlight Media cease to be shareholders of Highlight Media.
Equity Option Agreement.
Under the equity option agreement among Makesi WFOE, Highlight Media and the shareholders of Highlight Media dated September 16, 2022, each of the shareholders of Highlight Media 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 Highlight Media. Also, Makesi WFOE or its designee has the right to acquire any and all of its assets of Highlight Media. Without Makesi WFOE’s prior written consent, Highlight Media’s shareholders cannot transfer their equity interests in Highlight Media and Highlight Media 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, Highlight Media and the shareholders of Highlight Media dated September 16, 2022, each Highlight Media 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 Highlight Media, including but not limited to the power to vote on its behalf on
all matters of Highlight Media requiring shareholder approval in accordance with the articles of association of Highlight Media. The proxy
agreement is for a term of
9
On February 27, 2023, Highlight WFOE entered into a series of assignment agreements with Makesi WFOE, Highlight Media and Highlight Shareholders, pursuant to which Makesi WFOE assign all its rights and obligations under the VIE agreements to Highlight WFOE. The VIE agreements and the assignment agreements grant Highlight WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Highlight Media, including absolute rights to control the management, operations, assets, property and revenue of Highlight Media. The assignment does not have any impact on Company’s unaudited interim consolidated financial statements.
On September 26, 2023, Highlight WFOE terminated the VIE agreements with Highlight Media and the shareholders of Highlight Media.
As of the date of this report, the Company primary operations are focused on the live streaming market with focus on e-commerce and live streaming interactive game in the United States through its subsidiaries AI Catalysis and SH Xianzhui. All Highlight Media enterprise brand management service have been disposed.
Liquidity and Capital Resources
As of September 30, 2024, the Company had $
The Company also intends to raise additional debt or equity capital to fund future operations. There is no assurance that the Company will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. In addition, the Company has planned and implemented cost-cutting measures to reduce operating expenditures and loss. Management believes that the Company can adjust the pace of its business development and control operating expenses when necessary. Therefore, the Company assesses that current working capital, together with the letter of financial support from Mr. Xiaojian Wang, will be sufficient to meet its obligations for the next 12 months from the issuance date of this report. These unaudited consolidated financial statements are prepared on going concern basis.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements reflect all adjustments that, in the opinion of management, are of a normal recurring nature and are necessary to fairly present the financial statements for the interim periods. The unaudited interim consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Results for the interim periods are not necessarily indicative of results to be expected for the full year. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on April 2, 2024, as amended on July 8, 2024 and July 22, 2024.
Principles of Consolidation
The unaudited interim consolidated financial statements of the Company include the accounts of GDC and its wholly owned subsidiaries and VIEs. All intercompany transactions and balances are eliminated upon consolidation.
Use of Estimates and Assumptions
The preparation of unaudited interim consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited interim consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited interim consolidated financial statements include the useful lives of intangible assets and equipment, impairment of long-lived assets, collectability of receivables, fair value of convertible notes, discount rate used to measure present value of lease liabilities and valuation allowance for deferred tax assets. Actual results could differ from these estimates.
10
Foreign Currency Translation and Transactions
The reporting currency of the Company is the U.S. dollar. The PRC subsidiaries of the Company conduct their businesses in the local currency, Renminbi (RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted set forth in the H.10 statistical release of the Federal Reserve Board at the end of the period. The statements of operations accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments included in accumulated
other comprehensive income amounted to $
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits placed with commercial banks or other financial institutions and highly liquid investments that are readily convertible to known amounts of cash and with original maturities from the date of purchase of three months or less. All cash and cash equivalents are unrestricted as to withdrawal and use.
Loan Receivable
Loan receivable is the amounts lent to a third
party with the interest rate of
Prepaid and Other Current Assets
Prepaid and other current assets are advances paid to outside vendors for services purchases. The Company has legally binding contracts with its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.
Convertible Notes Receivable
The Company evaluated the terms of the DigiTrax Convertible Notes and the Liquid Convertible Notes (as defined in Note 12) according to ASC 320 “Investments — Debt Securities” and concluded that the convertible notes should be classified as an available-for-sale (“AFS”) security and measured at fair value. To evaluate the fair value of the available-for-sale security, the Company used the discounted cash flow method. The fair value changes of the convertible notes receivable were recorded as other comprehensive income.
The Company evaluates quarterly whether AFS securities are other-than-temporarily impaired (OTTI) based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, the credit rating of the issuer or security, the failure of the issuer to make scheduled principal or interest payments, and the financial health and prospects of the issuer or security.
Declines in the value of AFS securities determined to be OTTI are recognized in earnings and included in other-than-temporary impairment losses. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if the Company will be required to sell the security prior to any anticipated recovery. If the Company determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the difference between the amortized cost and the current fair value. A debt security is also determined to be OTTI if the Company does not expect to recover the amortized cost of the security. However, in this circumstance, if the Company does not intend to sell the security and will not be required to sell the security, the impairment recognized in earnings equals the estimated credit loss as measured by the difference between the present value of expected cash flows and the amortized cost of the security. Expected cash flows are discounted using the security’s effective interest rate. An equity security is determined to be OTTI if the Company does not expect to recover the cost of the security. Declines in the value of AFS securities determined to be temporary are reported, net of tax, as other comprehensive earnings (losses) and included as a separate component of stockholders’ equity.
11
Equipment
| Useful Life | Estimated Residual Value | |||||
| Office equipment and furnishing | | % | ||||
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of operations and comprehensive loss. 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 to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Intangible Assets
Intangible assets represent software copyright
that 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. The
software copyrights 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 software copyrights, 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 revised estimates of useful lives.
| Useful Life | ||
| Software copyrights |
Lease
The Company determines if an arrangement is a lease at inception. Leases that transfer substantially all of the benefits and risks incidental to the ownership of assets are accounted for as finance leases as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases. The Company has no significant finance leases.
The Company recognizes lease liabilities and corresponding right-of-use assets on the balance sheet for leases. Operating lease right- of-use assets (the “ROU”) are disclosed as non-current assets in the Company’s consolidated balance sheets. Current maturities of operating lease liabilities are classified as operating lease liabilities - current, and operating lease liabilities that will be due in more than one year are disclosed as non-current liabilities on the consolidated balance sheets. Operating lease right-of-use assets and operating lease liabilities are initially recognized based on the present value of future lease payments at lease commencement. The operating lease right-of-use asset also includes any lease payments made prior to lease commencement and the initial direct costs incurred by the lessee and is recorded net of any lease incentives received. As the interest rates implicit in most of the leases are not readily determinable, the Company uses the incremental borrowing rates based on the information available at lease commencement to determine the present value of the future lease payments. Operating lease expenses are recognized on a straight-line basis over the term of the lease.
Most leases have initial terms ranging from
The Company evaluates the carrying value of ROU assets if there are indicators of impairment and reviews the recoverability of the related asset group.
The Company reassesses of a contract is or contains a leasing arrangement and re-measures ROU assets and liabilities upon modification of the contract. The Company will derecognize ROU assets and liabilities, with difference recognized in the income statement on the contract termination.
12
Impairment for Long-lived Assets
Long-lived assets, including equipment, intangible assets and ROU 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 individually or as a group at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of the other assets and liabilities. The Company assesses the recoverability of the assets (or group of assets) based on the undiscounted future cash flows the assets (or group of 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 (or group of assets) plus net proceeds expected from disposition of the asset (or group of assets), if any, are less than the carrying value of the asset (or group of assets). If an impairment is identified, the Company would reduce the carrying amount of the asset (or group of assets) to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. The carrying amount of the asset (or the long-lived assets in the asset group on a pro rata basis using the relative carrying amounts) is reduced to the extent not lower than the fair value of the asset. The adjusted carrying amounts after an impairment charge represent the new cost basis and is depreciated over their remaining useful lives.
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, accounts receivable, loan receivable, other receivables, accounts payable, other payables and accrued liabilities 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. |
As of September 30, 2024 and December 31, 2023, the carrying values of cash, other receivables, loan receivable, other payables and accrued liabilities approximate their fair values due to the short-term nature of the instruments. Fair value of convertible notes receivable have been discussed in Note 20.
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 ASC 606 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.
The ASC 606 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 ASC 606 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.
13
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.
The Company, as a principal, provides services to clients under separate contracts, generating revenue. The pricing terms specified in the contracts are fixed. An obligation to perform is identified in contracts with clients. Revenue is recognized over the period in which the services are earned.
Payments received prior to the relevant criteria for revenue recognition are met, are recorded as customer deposits.
The Company have $ and $
Income Taxes
The Company accounts for income taxes in accordance with U.S. GAAP. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred taxes is accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the unaudited interim consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company incurred no such penalties and interest for the nine months ended September 30, 2024 and 2023.
Interest
Interest income is mainly generated from bank deposits and other interest earning financial assets and is recognized on an accrual basis using the effective interest method.
Net Loss per Common Stock
Basic loss per share is computed by dividing loss available to common shareholders of the Company by the weighted average common stocks outstanding during the period. Diluted loss per share takes into account the potential dilution that could occur if securities or other contracts to issue common stocks were exercised and converted into common stocks.
In May 2023 and November 2023 in connection with
the placement agency agreements (see Note 16), the Company issued and sold pre-funded warrants exercisable for an aggregate of
On November 1, 2023, in connection with the Warrant
Exchange Agreements (see Note 16), the holders of May 2023 Unregistered Warrants (as defined in Note 16) surrendered the May 2023 Unregistered
Warrants, and the Company cancelled the May 2023 Unregistered Warrants and issued to these holders pre-funded warrants to purchase up
to
14
For the nine months ended September 30, 2024,
For the nine months ended September 30, 2023,
For the nine months ended September 30, 2024 and
2023,
Comprehensive Loss
Comprehensive loss is defined as the changes in equity of the Company during a year from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Accumulated other comprehensive income of the Company includes the foreign currency translation adjustments and unrealized gains or loss on available-for-sale investments.
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net loss or and financial position.
Recently Accounting Pronouncements
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The new amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. The Company has evaluated and concluded that there’s no impact of the new guidance on the unaudited interim consolidated financial statements. The Company adopted ASU 2021-08 since January 1, 2024.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”, which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. This guidance also requires certain disclosures for equity securities subject to contractual sale restrictions. The new guidance is required to be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. This guidance is effective for fiscal years beginning after 15 December 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company has evaluated and concluded that there’s no impact of the new guidance on the unaudited interim consolidated financial statements. The Company adopted ASU 2022-03 since January 1, 2024.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The purpose of the amendment is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. The Company will begin providing the enhanced reportable segment financial disclosures effective with its Annual Report on Form 10-K for the year ending December 31, 2024.
15
In December 2023, the FASB issued ASU 2023-08, Intangibles - Goodwill and Other - Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, which establishes accounting guidance for crypto assets meeting certain criteria. Bitcoin meets this criteria. The amendments require crypto assets meeting the criteria to be recognized at fair value with changes recognized in net income each reporting period. Upon adoption, a cumulative-effect adjustment is made to the opening balance of retained earnings as of the beginning of the annual reporting period of adoption. ASU 2023-08 is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The Company has evaluated and concluded that there’s no impact of the new guidance on the unaudited interim consolidated financial statements. The Company adopted ASU 2022-08 since January 1, 2024.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09), which requires disclosure of incremental income tax information within the rate reconciliation and expanded disclosures of income taxes paid, among other disclosure requirements. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company’s management does not believe the adoption of ASU 2023-09 will have a material impact on its financial statements and disclosures.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited interim consolidated balance sheets, unaudited interim consolidated statements of operations and comprehensive loss and unaudited interim consolidated statements of cash flows.
Note 3 – Variable Interest Entity
Yuanma
On June 21, 2022, Makesi WFOE entered into a series of contractual arrangements with Yuanma and its shareholders. The significant terms of these contractual arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the Company classified Yuanma as VIE.
On June 26, 2023, GDC entered into a share purchase
agreement with a buyer unaffiliated with the Company. Pursuant to the agreement, the Company agreed to sell and the buyer agreed to purchase
all the issued and outstanding equity interest in TMSR HK, which hold
Highlight Media
On September 16, 2022, Makesi WFOE entered into contractual arrangements with Highlight Media and its shareholders. The significant terms of these contractual arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the Company classifies Highlight Media as VIE.
On February 27, 2023, Highlight WFOE entered into a series of assignment agreements with Makesi WFOE, Highlight Media and Highlight Shareholders, pursuant to which Makesi WFOE assign all its rights and obligations under the VIE agreements to Highlight WFOE. The VIE agreements and the assignment agreements granted Highlight WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Highlight Media, including absolute rights to control the management, operations, assets, property and revenue of Highlight Media. The assignment did not have any impact on Company’s unaudited interim consolidated financial statements.
On September 26, 2023, Highlight WFOE entered
into a termination agreement with Highlight Media and the shareholders of Highlight Media to terminate the VIE Agreements and sell the
interest in the VIE Agreements for a purchase price of $
16
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. Highlight WFOE is deemed to have a controlling financial interest and be the primary beneficiary of Highlight Media and Makesi WFOE is deemed to have a controlling financial interest and be the primary beneficiary of Yuanma because Highlight WFOE and Makesi WFOE have both of the following characteristics:
| (1) | The power to direct activities at Highlight Media and Yuanma that most significantly impact such entity’s economic performance, and |
| (2) | The obligation to absorb losses of, and the right to receive benefits from Highlight Media and Yuanma that could potentially be significant to such entity. |
Accordingly, the accounts of Highlight Media and Yuanma are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, Yuanma’s financial positions and results of operations were included in the Company’s unaudited interim consolidated financial statements prior to June 26, 2023 and Highlight Media’s financial positions and results of operations were included in the Company’s unaudited interim consolidated financial statements prior to September 26, 2023.
As of and for the nine months ended September 30, 2024, the Company did not have any VIE operations. The operations results from VIE operations for the nine months ended September 30, 2023 have been reflected in discontinued operations as disclosed in Note 19.
Note 4 – Cash and Cash Equivalents
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| Cash at Banks | $ | $ | ||||||
Note 5 – Prepaid and Other Current Assets
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| Prepayments of digital human services | $ | $ | ||||||
| Prepayments of live streaming services | ||||||||
| Other prepayments | ||||||||
| Total prepaid and other current assets | $ | $ | ||||||
Note 6 – Loan Receivable
On January 13, 2024,
the Company entered into a loan agreement with Lotus City Limited (“Lotus”), pursuant to which, the Company agreed to lend
$
17
On April 3, 2024 and
June 4, 2024, Lotus repaid $
For the three and nine
months ended September 30, 2024, the Company accrued $
Note 7 – Other Receivables
September 30, 2024 | December 31, 2023 | |||||||
| (unaudited) | ||||||||
| Interest receivable | $ | $ | ||||||
| Lease deposit | ||||||||
| Total other receivables, net | $ | $ | ||||||
Note 8 – Equipment, net
September 30, 2024 | December 31, 2023 | |||||||
| (unaudited) | ||||||||
| Office equipment and furniture | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation expense for the three months ended
September 30, 2024 and 2023 amounted to $
Note 9 – Intangible Assets, net
September 30, 2024 | December 31, 2023 | |||||||
| (unaudited) | ||||||||
| Software copyrights | $ | $ | ||||||
| Subtotal | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Accumulated impairment | ( | ) | ||||||
| Total | $ | $ | ||||||
Amortization expense for the three months ended
September 30, 2024 and 2023 was $
Due to limited potential economic benefits for
varying reasons for the nine months ended September 30, 2024, the Company recognized impairment losses of $
18
Note 10 – Other Payables and Accrued Liabilities
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| Professional service fee | $ | $ | ||||||
| Payroll | ||||||||
| Rental | ||||||||
| Travel and Entertainment expenses | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
Note 11 – Related Party Transactions
| Name of related party | Relationship | Nature | September 30, 2024 | December 31, | ||||||||
| (unaudited) | ||||||||||||
| Xiaojian Wang | $ | $ | ||||||||||
| Xiaojian Wang | ||||||||||||
| Xiaojian Wang | ||||||||||||
| Zihao Zhao | ||||||||||||
| Zihao Zhao | ||||||||||||
| Total | $ | $ | ||||||||||
As of September 30, 2024 and December 31, 2023,
the balance of other payables- related parties were $
For the three and nine months ended September
30, 2024, the Company recorded compensation expenses to its officers amounted to $
19
Note 12 – Convertible Notes Receivable
| Convertible Notes Receivable | ||||
| Beginning | $ | |||
| Convertible note receivable | ||||
| Fair value changes of convertible notes | ||||
| As of December 31, 2023 | ||||
| Fair value changes of convertible notes | ||||
| As of March 31, 2024 | ||||
| Fair value changes of convertible notes | ( | ) | ||
| Other-than-temporary impairment losses on convertible note receivable | ( | ) | ||
| AS of June 30, 2024 | ||||
| Fair value changes of convertible notes | ( | ) | ||
| As of September 30, 2024 | $ | |||
On June 1, 2023 and August 17, 2023, the Company
purchased two convertible notes issued by DigiTrax Entertainment Inc. (the “DigiTrax”) for an aggregated of $
On June 2, 2023 and August 17, 2023, the Company
purchased two convertible notes issued by Liquid Marketplace Corp. (the “Liquid”) for an aggregated of $
The Company evaluated the terms of the DigiTrax Convertible Notes and the Liquid Convertible Notes according to ASC 320 and concluded that these notes should be classified as an available-for-sale security and measured at fair value.
As of September 30, 2024, the DigiTrax Convertible Notes were due and extended to May 31, 2025 and August 17, 2025, respectively, with the same terms and conditions as set forth in the original notes, as agreed by the Company and DigiTrax.
As of September 30, 2024, the Liquid Convertible
Notes were due, but the Company failed to collect repayments from Liquid. The Company evaluated the recoverability of the aggregated $
For the nine months ended September 30, 2024
and 2023, the Company recorded unrealized loss on the fair value changes of these notes amounted to $
20
Note 13 – Leases
Leases are classified as operating leases or finance
leases in accordance with ASC 842 Leases. The Company’s operating leases mainly related to the rights to use building and
office facilities. For leases with terms greater than 12 months, the Company records the related asset and liability at the present
value of lease payments over the term.
September 30, 2024 | December 31, 2023 | |||||||
| (unaudited) | ||||||||
| Weighted average remaining lease term: | ||||||||
| Operating lease | ||||||||
| Weighted average discount rate: | ||||||||
| Operating lease | % | % | ||||||
September 30, 2024 | December 31, 2023 | |||||||
| (unaudited) | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Operating lease | $ | $ | ||||||
| Lease liabilities | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Non-current portion of operating lease liabilities | ||||||||
| $ | $ | |||||||
Operating Leases | ||||
| Remainder of FY2024 | $ | |||
| FY2025 | ||||
| FY2026 | ||||
| FY2027 | ||||
| FY2028 | ||||
| FY2029 | ||||
| Total lease payments | $ | |||
| Less: imputed interest | ||||
| Present value of lease liabilities (1) | $ | |||
| (1) |
Lease expense for all the Company’s operating
leases for the three and nine months ended September 30, 2024 were $
21
Note 14 – Taxes
Income Tax
United States
GDC was organized in the state of Delaware in
April 2015. As of September 30, 2024 and December 31, 2023, GDC’s net operating loss carry forward for United States income taxes
was approximately $
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
British Virgin Islands
Citi Profit BVI is incorporated in the British Virgin Islands and are not subject to tax on income or capital gains under current British Virgin Islands law. In addition, upon payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
TMSR HK and Highlight HK are 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. TMSR and Highlight HK are subject to Hong Kong profit tax at a rate of
PRC
Makesi WFOE, Highlight WFOE, Highlight Media,
Yuanma and SH Xianzhui 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
For the nine months ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| (unaudited) | (unaudited) | |||||||
| Current tax expenses | $ | $ | ||||||
| Deferred tax benefits | ( | ) | ||||||
| Total | $ | ( | ) | $ | ||||
22
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| Deferred tax assets | ||||||||
| Net operating losses carried forward | $ | $ | ||||||
| Lease liability | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net | $ | $ | ||||||
| Deferred tax liabilities | ||||||||
| Right - Of - Use assets | $ | $ | ||||||
| Deferred tax liabilities, net | $ | $ | ||||||
Value added tax
Enterprises or individuals who sell commodities,
provide services, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax (the “VAT”)
in accordance with PRC laws. The VAT standard rates changed to
As of September 30, 2024 and December 31, 2023, there is no balance of the value added tax payable.
Note 15 – Concentration of Risk
Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation (“FDIC”) up to $
As of September 30, 2024 and December 31, 2023,
$
Note 16 – Equity
Statutory Reserves and Restricted Net Assets
In accordance with the PRC Regulations on Enterprises
with Foreign Investment, an enterprise established in the PRC with foreign investment is required to make appropriations to certain statutory
reserves, namely a general reserve fund, an enterprise expansion fund, a staff welfare fund and a bonus fund, all of which are appropriated
from net profit as reported in its PRC statutory accounts. A foreign invested enterprise is required to allocate at least
In addition, under PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer their net assets to the Company in the form of dividend payments, loans or advances. Amounts of restricted net assets include paid up capital and statutory reserve funds of the Company’s PRC subsidiaries. As of September 30, 2024 and December 31, 2023, the Company did not have any restricted net assets.
Furthermore, cash transfers from the Company’s PRC subsidiaries to the Company’s subsidiaries outside of the PRC are subject to the PRC government control of currency conversion. Shortages in the availability of foreign currency may restrict the ability of the Company’s PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency denominated obligations.
23
Common Stock
On May 1, 2023, the Company entered into a placement agency agreement (the “May 2023 Placement Agency Agreement”), with Univest Securities, LLC (the “Placement Agent” or “Univest”), pursuant to which, the Placement Agent agrees to use its reasonable best efforts to sell the Company’s common stock in a registered direct offering (the “May 2023 RD Offering”), and a concurrent private placement (the “May 2023 PIPE Offering”, together with the RD Offering, collectively the “May 2023 Offering”). The Placement Agent has no obligation to buy any of the securities from the Company or to arrange for the purchase or sale of any specific number or dollar amount of securities.
On May 4, 2023, the Company sold an aggregate
of
In connection with the May 2023 Offering, the
Company paid Univest a total cash fee equal to
On June 22, 2023, the Company entered into a software
purchase agreement with Northeast Management LLC, a seller unaffiliated with the Company. Pursuant to the agreement, the Company agreed
to purchase, and the seller agreed to sell all of seller’s right, title, and interest in and to the certain software. The purchase
price of the software shall be $
On November 1, 2023, the Company entered into a placement agency agreement (the “November 2023 Placement Agency Agreement”), with Univest, pursuant to which, Univest agrees to use its reasonable best efforts to sell the Company’s common stock in a registered direct offering and a concurrent private placement (the “November 2023 Offering”). Univest has no obligation to buy any of the securities from the Company or to arrange for the purchase or sale of any specific number or dollar amount of securities.
Pursuant to the November 2023 Offering, (i)
an aggregate of
The total proceeds from the November 2023 Offering
was approximately $
24
In November and December 2023, holders of
On January 11, 2024, the Company issued the
In March 2024, the Company entered into a placement agency agreement (the “March 2024 Placement Agency Agreement”), with Univest, pursuant to which, Univest agrees to use its reasonable best efforts to sell the Company’s common stock in a registered direct offering and a concurrent private placement (the “March 2024 Offering”). Univest has no obligation to buy any of the securities from the Company or to arrange for the purchase or sale of any specific number or dollar amount of securities.
Pursuant to the March 2024 Offering, an aggregate
of
The May 2023 Offering, the November 2023 Offering and the March 2024 Offering were being made pursuant to a shelf registration statement (No. 333-254366) on Form S-3, which was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on March 26, 2021, and related prospectus supplement.
On May 31, 2024, the Company entered into a software
purchase agreement with Shanxi Gangdong Cultural Media Co., Ltd., a seller unaffiliated with the Company (the “Seller”). Pursuant
to the agreement, the Company agreed to purchase and the Seller agreed to sell all of Seller’s right, title, and interest in and
to the certain software. The purchase price of the software shall be $
As of September 30, 2024 and December 31, 2023,
the total outstanding shares of the Company’s common stock were
Warrants and Options
On July 29, 2015, the Company sold
25
The sponsor of the Company purchased, simultaneously
with the closing of the IPO on July 29, 2015,
The Company sold to the underwriter (and/or its
designees), for $
After the 1-for-30 reverse stock split effective on November 9, 2022, all options, warrants and other convertible securities of the Company outstanding immediately prior to the reverse stock split were adjusted by dividing the number of shares of common stock into which the options, warrants and other convertible securities are exercisable or convertible by thirty (30) and multiplying the exercise or conversion price thereof by thirty (30), all in accordance with the terms of the plans, agreements or arrangements governing such options, warrants and other convertible securities and subject to rounding to the nearest whole share.
On February 18, 2021, the Company entered into
a securities purchase agreement (the “February 2021 Securities Purchase Agreement”) with certain purchasers, pursuant to which,
on February 22, 2021, the Company sold (i)
The February 2021 Registered Warrants have a term
of
The February 2021 Unregistered Warrants have a
term of five and one-half years and are 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 the securities sold under the February 2021 Securities
Purchase Agreement, to purchase an aggregate of up to
The Company paid the Placement Agent a cash fee
of $
Pursuant to the February 2021 Securities Purchase
Agreement, the Company is required to hold a meeting of our shareholders not later than April 29, 2021 to seek such approval as may be
required from our shareholders (the “Stockholder Approval”), in accordance with applicable law, the applicable rules and regulations
of the Nasdaq Stock Market, our certificate of incorporation and bylaws and the Nevada Revised Statutes with respect to the issuance of
the securities in the Offering, including the Warrants sold in the Private Placement, so that the issuance by us of shares of common stock
in excess of the
26
On April 29, 2021, the Company held a special
meeting of shareholders and approved the issuance of shares of common stock in excess of the
In August 2024, holders of February 2021 Registered
Warrants and the February 2021 Unregistered Warrants exercised their option to purchase an aggregated of
On May 1, 2023, pursuant to the May 2023 Placement
Agency Agreement as described above, Pre-Funded warrants to purchase up to an aggregate of
In connection with the May 2023 Offering, unregistered
warrants to purchase up to
In concurrent with the November 2023 Offering,
on November 1, 2023, the Company entered into certain warrant exchange agreements (the “Warrant Exchange Agreements” with
May 2023 Offering Purchasers. Pursuant to the Warrant Exchange Agreements, the holders of May 2023 Unregistered Warrants shall surrender
the May 2023 Unregistered Warrants, and the Company shall cancel the May 2023 Unregistered Warrants and shall issue to these holders pre-funded
warrants to purchase up to
From July 2024 to September 2024, holders of
The Placement Agent of the May 2023 Offering also
received warrants to purchase up to
In connection with the November 2023 Offering,
27
The Placement Agent of the November 2023 Offering
also received warrants purchase up to
In connection with the March 2024 Offering, the
Company issued
| Warrants | Exercisable Number of | Weighted Average Exercise | Average Remaining Contractual | |||||||||||||
| Outstanding | Shares | Price | Life | |||||||||||||
| December 31, 2023 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| September 30, 2024 (unaudited) | $ | |||||||||||||||
| Warrants | Exercisable Into Number of | Weighted Average Exercise | Average Remaining Contractual | |||||||||||||
| Outstanding | Shares | Price | Life | |||||||||||||
| December 31, 2022 | $ | |||||||||||||||
| Granted/Acquired | ||||||||||||||||
| Expired | ||||||||||||||||
| Exercised | ||||||||||||||||
| September 30, 2023 (unaudited) | $ | |||||||||||||||
Note 17 – 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 18 – 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, who has been identified as the Company’s chief executive officer, evaluates performance and determines resource allocations based on a number of factors, the primary measure being income from operations.
As of September 30, 2024, the Company’s remain business segment and operations is Virtual Content Production. The Company’s consolidated results of operations and consolidated financial position from continuing operations are almost all attributable to Virtual Content Production; accordingly, management believes that the unaudited interim consolidated balance sheets and unaudited interim consolidated statements of operations and comprehensive loss provide the relevant information to assess Virtual Content Production’s performance.
28
Note 19 – Discontinued Operations
For the Three Months Ended September 30, | For the Nine Months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| REVENUES | ||||||||||||||||
| Enterprise brand management services | $ | $ | $ | $ | ||||||||||||
| TOTAL REVENUES | ||||||||||||||||
| COST OF REVENUES | ||||||||||||||||
| Enterprise brand management services | ( | ) | ||||||||||||||
| TOTAL COST OF REVENUES | ( | ) | ||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||||||||||
| OTHER INCOME | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income (expenses) | ||||||||||||||||
| Total other income (expenses) | ( | ) | ||||||||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ||||||||||||
| PROVISION FOR INCOME TAXES | ( | ) | ||||||||||||||
| NET LOSS | $ | $ | ( | ) | $ | ( | ) | |||||||||
Note 20 – Assets and Liabilities Measured at Fair Value
September 30, 2024 | Quoted Prices In Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | |||||||||||||
| (unaudited) | ||||||||||||||||
| Assets | ||||||||||||||||
| Notes receivable - DigiTrax Convertible Notes | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
29
December 31, 2023 | Quoted Prices In Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | |||||||||||||
| Assets | ||||||||||||||||
| Notes receivable - DigiTrax Convertible Notes | $ | $ | $ | $ | ||||||||||||
| Notes receivable - Liquid Convertible Notes | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company evaluated the DigiTrax Convertible Notes and the Liquid Convertible Notes according to ASC 320 and concluded that these note receivables should be classified as available-for-sale security and measured at fair value. To evaluate the fair value of the available-for-sale security, the Company used the discounted cash flow method. The fair value changes of these notes were recorded as other comprehensive income on the accompanying consolidated statements of operations at each reporting date. As a result of the unobservable inputs, the available-for-sale security was classified as Level 3 as of September 30, 2024 and December 31, 2023.
There were no transfers among the three hierarchies for the nine months ended September 30, 2024 and 2023.
Note 21 – Subsequent events
Subsequent to September 30, 2024 and up to the
date the unaudited consolidated financial statements were issued, holders of
On October 4, 2024 and October 23, 2024, the CEO
lent $
30
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 financial statements, and the notes to those unaudited 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 SEC.
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
GD Culture Group Limited, formerly known as JM Global Holding Company, TMSR Holding Company Limited and Code Chain New Continent Limited, is a Nevada corporation and a holding company. The Company currently conducts its operations on virtual content production (the “Virtual Content Production”) through the Company and two subsidiaries, AI Catalysis and Shanghai Xianzhui. The Company focuses its business mainly on 1) AI-driven digital human creation and customization; 2) Live streaming and e-commerce and 3) Live streaming interactive game. The company has relentlessly been focusing on serving its customers and creating value for them through the continual innovation and optimization of its products and services. The Company’s current subsidiaries, Citi Profit, Highlight HK, Highlight WFOE, and previous subsidiaries, TMSR Holdings Limited (“TMSR HK”) and Makesi WFOE are holding companies with no material operations.
For AI-driven digital human sector, the Company uses AI algorithms and software to generate realistic 3D or 2D digital human models. AI algorithms and machine learning models are used to simulate human characteristics, such as facial expressions, body movements, and even speech patterns. These models can be customized to create and personalize lifelike digital representations of humans. Customization may involve adjusting facial features, body proportions, skin textures, hair styles, clothing, and more. Once created and customized, digital humans find applications in a wide range of industries, including gaming, entertainment, advertising, education, and more. Depending on the specific industry and the application scenario, the Company helps the customers to define the objectives to achieve with digital humans, choose the technology for character customization, then create unique aviators and deploy in the chosen platform.
31
For live streaming and e-commerce sector, the Company applies digital human technology in live streaming e-commerce businesses. Livestream usage is taking off globally. The integration of cutting-edge AI digital human technologies and live streaming platforms will transform the way businesses, sellers and consumers engage in online commerce. Digital anchors can offer long-duration intelligent live broadcasting. It also supports customized avatars that perfectly adapt to different live streaming scenarios. The company has introduced online e-commerce businesses on TikTok.
For live streaming interactive game sector, the Company has introduced some licensed games on the TikTok account (TikTok account: almplify001), providing a diverse gaming experience for the players.
The Company aims to generate revenue from: 1) Service revenue and advertising revenue from digital human creation and customization; 2) Products’ sales revenue from social live streaming e-commerce business; and 3) Virtual paid gifts revenue from live streaming interactive gaming.
Recent Development
Change of Auditor
On October 9, 2023, the Company notified its independent registered public accounting firm, Enrome LLP, its decision to dismiss Enrome LLP as the Company’s auditor. On October 12, 2023, the Audit Committee and the Board of Directors of the Company approved the appointment of HTL as its new independent registered public accounting firm to audit the Company’s consolidated statements.
Investment in Shanghai Xianzhui
On August 10, 2023, Highlight WFOE, Beijing Hehe Property Management Co., Ltd. (“Beijing Hehe”), and a third party, established Shanghai Xianzhui under the laws of the People’s Republic of China for social media marketing. Highlight WFOE owned 60% of the equity interest of Shanghai Xianzhui, Beijing Hehe owned 20% of the equity interest of Shanghai Xianzhui and the third party owned the remaining 20% of the equity interest of Shanghai Xianzhui.
On October 27, 2023, the Company entered into an equity purchase agreement with Highlight WFOE and Beijing Hehe, which was amended on November 10, 2023 (such equity purchase agreement, as amended, the “Agreement” for purpose of this section “Investment in Shanghai Xianzhui”), pursuant to which the Highlight WFOE agreed to purchase 13.3333% equity interest in Shanghai Xianzhui from Beijing Hehe and the Company agreed to issue 400,000 shares of common stock of the Company, valued at $2.7820 per share, the average closing bid price of the common stock of GDC as of the five trading days immediately preceding the date of the Agreement, to Beijing Hehe or its assigns. On January 11, 2024, the Company issued the 400,000 shares of its common stock to Beijing Hehe, at the price of $2.5 per share, and the transaction was completed. As of September 30, 2024, the Company owns 73.3333% of the total equity interest of Shanghai Xianzhui.
Registered Direct Offering
On March 26, 2024, the Company issued 810,277 shares of common stock in a registered direct offering. See Note 16 of the notes to the unaudited consolidated financial statements.
32
Nasdaq Compliance
On May 13, 2024, the Company received a written notice from the Listing Qualifications Department of the Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that, based on the closing bid price of the Company’s common stock was below $1.00 for the last 30 consecutive trading days, the Company no longer complies with the minimum bid price requirement (the “Minimum Bid Price Requirement”) for continued listing on the Nasdaq Capital Market as set forth in Nasdaq Listing Rule 5450(a)(1). Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company has an initial compliance period of 180 calendar days, or until November 11, 2024, to regain compliance with the Minimum Bid Price Requirement.
On June 18, 2024, the Company received a letter from Nasdaq stating that because the Company’s common stock had a closing bid price at or above $1.00 per share for 10 consecutive business days, the Company had regained compliance with the Minimum Bid Price Requirement, and that the matter is now closed.
Software Purchase Agreement
On May 31, 2024, the Company entered into a software purchase agreement with Shanxi Gangdong Cultural Media Co., Ltd., a seller unaffiliated with the Company (the “Seller”). Pursuant to the agreement, the Company agreed to purchase and the Seller agreed to sell all of Seller’s right, title, and interest in and to the certain software. The purchase price of the software shall be $1,248,000, payable in the form of issuance of 1,560,000 shares of common stock of the Company, valued at $0.80 per share. The Company plans to use the software to develop its AI business. On June 4, 2024, the Company issued 1,560,000 shares of common stock of the Company to the Seller’s designees and the transaction was completed.
Key Factors that Affect Operating Results
Competition
E-commerce and live streaming is a competitive industry. Our competition varies and includes content creators on TikTok and other social media platform. Each of these competitors competes with us based on quality of content, activeness and responsiveness on the social placement, product selection, product quality, customer service, price, store format, location, or a combination of these factors. Some of these competitors may have been in business longer, may have more experience, or may have greater financial or marketing resources than us. As competition intensifies, our results of operations may be negatively impacted through a loss of sales and decrease in market share.
Retention of Key Management Team Members
Our management team comprises executives with extensive experience in technology and content creation. The management team has led us to take leaps in deploying AI technology in live-steaming, e-commerce, gaming and other sectors. The loss of any of our key executive team member might affect our business and our result of operation.
Our Ability to Grow Market Presence and Penetrate New Markets
We are still in an early development stage. We intend to expand our presence on social media to increase the market presence. If we cannot grow market presence and penetrate new markets in an effective and cost-efficient way, our results of operation will be negatively impacted.
33
Impact of the COVID-19 Pandemic
The COVID-19 pandemic did not have a material impact on our business or results of operation for the nine months ended September 30, 2024 and 2023. However, the extent to which the COVID-19 pandemic may negatively impact the general economy and our business is highly uncertain and cannot be accurately predicted. These uncertainties may impede our ability to conduct our 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
For Three Months Ended September 30, 2024 vs. September 30, 2023
For Three Months Ended September 30, | Percentage | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Revenues | ||||||||||||||||
| Software copyright | $ | - | $ | - | $ | - | - | |||||||||
| Total revenues | - | - | - | - | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Software copyright | - | - | - | - | ||||||||||||
| Total cost of revenues | - | - | - | - | ||||||||||||
| Gross profit | - | - | - | - | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling expenses | 2,909 | - | 2,909 | - | ||||||||||||
| General and administrative expenses | 873,067 | 1,596,340 | (723,273 | ) | (45.3 | )% | ||||||||||
| Research and development expense | 217,500 | - | 217,500 | - | ||||||||||||
| Total operating expenses | 1,093,476 | 1,596,340 | (502,864 | ) | (31.5 | )% | ||||||||||
| Loss from operations | (1,093,476 | ) | (1,596,340 | ) | 502,864 | (31.5 | )% | |||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 10,381 | 46,891 | (36,510 | ) | (77.9 | )% | ||||||||||
| Interest expense | - | (52 | ) | 52 | (100 | )% | ||||||||||
| Other-than-temporary impairment losses | (2,756,986 | ) | - | (2,756,986 | ) | - | ||||||||||
| Other income, net | - | 100,000 | (100,000 | ) | (100 | )% | ||||||||||
| Total other income (expenses) | (2,746,605 | ) | 146,839 | (2,893,444 | ) | (1970.5 | )% | |||||||||
| Loss before income tax from continuing operations | (3,840,081 | ) | (1,449,501 | ) | (2,390,580 | ) | 164.9 | % | ||||||||
| Provision for income taxes | (748 | ) | - | (748 | ) | - | ||||||||||
| Loss from continuing operations | (3,839,333 | ) | (1,449,501 | ) | (2,389,832 | ) | 164.9 | % | ||||||||
| Loss from continuing operations attributable to GD Culture Group Limited | (3,741,199 | ) | (1,347,016 | ) | (2,394,183 | ) | 177.7 | % | ||||||||
| Loss from continuing operations attributable to non-controlling interest | (98,134 | ) | (102,485 | ) | 4,351 | (4.2 | )% | |||||||||
| Discontinued operations: | ||||||||||||||||
| Loss from discontinued operations | - | (2,081,029 | ) | 2,081,029 | (100 | )% | ||||||||||
| Loss on disposal, net of taxes | - | (230 | ) | 230 | (100 | )% | ||||||||||
| Net Loss | $ | (3,839,333 | ) | $ | (3,530,760 | ) | $ | (308,573 | ) | 8.7 | % | |||||
Revenues
The Company’s revenue was $nil for the three months ended September 30, 2024 and September 30, 2023.
Gross Profit
The Company’s gross profit was $nil for the three months ended September 30, 2024 and September 30, 2023.
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Operating Expenses
The Company’s operating expenses include selling and marketing (“S&M”) expenses, general and administrative (“G&A”) expenses, research and development (“R&D”) expenses. S&M expenses increased to approximately $2,909 for the three months ended September 30, 2024, compared to approximately $nil for the three months ended September 30, 2023. The increase was mainly due to the Company increased inputs on artificial intelligence marketing and advertising to improve its brand reputation, attract a large following on social media. G&A expenses decreased by approximately $0.7 million from approximately $1.60 million for the three months ended September 30, 2023 to approximately $0.9 million for the three months ended September 30, 2024. The decrease was mainly due to the of the decrease in the professional service fee. R&D expenses increased to approximately $0.2 million for the three months ended September 30, 2024, compared to nil for the three months ended September 30, 2023. The increase was mainly due to the Company increased inputs on research and development about our artificial intelligence based digital human application, to create unconventional digital characters and customize digital humans to support the clients’ marketing efforts.
Other Income (Expenses)
The Company’s other expense increased by approximately $2.9 million during the three months ended September 30, 2024, compared to $146,839 other income for the three months ended September 30, 2023. The other expense increase was mainly due to the other-than-temporary impairment losses from convertible note and intangible assets.
Loss from Continuing Operations
As a result of the foregoing, loss from continuing operations for the three months ended September 30, 2024 was approximately $3.8 million, an increase of approximately 164.9%, from loss from continuing operations of approximately $1.4 million for the three months ended September 30, 2023.
Net Loss
The Company’s net loss increased by approximately $0.3 million, or 8.7%, to approximately $3.8 million net loss for the three months ended September 30, 2024, from approximately $3.5 million net loss for the three months ended September 30, 2023. The increase was mainly due to the other-than-temporary impairment losses from convertible note and intangible assets, partially net off by the decline on loss from discontinued operations.
For Nine Months Ended September 30, 2024 vs. September 30, 2023
| For Nine Months Ended September 30, | Percentage | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Revenues | ||||||||||||||||
| Software copyright | $ | - | $ | 150,000 | $ | (150,000 | ) | (100 | )% | |||||||
| Total revenues | - | 150,000 | (150,000 | ) | (100 | )% | ||||||||||
| Cost of revenues | ||||||||||||||||
| Software copyright | - | - | - | - | ||||||||||||
| Total cost of revenues | - | - | - | - | ||||||||||||
| Gross profit | - | 150,000 | (150,000 | ) | (100 | )% | ||||||||||
| Operating expenses | ||||||||||||||||
| Selling expenses | 2,402,909 | - | 2,402,909 | 100 | % | |||||||||||
| General and administrative expenses | 4,345,438 | 1,872,194 | 2,473,244 | 132.1 | % | |||||||||||
| Research and development expense | 652,000 | - | 652,000 | 100 | % | |||||||||||
| Total operating expenses | 7,400,847 | 1,872,194 | 5,528,653 | 295.3 | % | |||||||||||
| Loss from operations | (7,400,847 | ) | (1,722,194 | ) | (5,678,653 | ) | 329.7 | % | ||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 45,383 | 47,070 | (1,687 | ) | (3.6 | )% | ||||||||||
| Interest expense | - | (52 | ) | 52 | (100 | )% | ||||||||||
| Other-than-temporary impairment losses | (4,256,986 | ) | - | (4,256,986 | ) | - | ||||||||||
| Other income | - | 100,000 | (100,000 | ) | (100 | )% | ||||||||||
| Total other income (expenses) | (4,211,603 | ) | 147,018 | (4,358,621 | ) | (2964.7 | )% | |||||||||
| Loss before income tax from continuing operations | (11,612,450 | ) | (1,575,176 | ) | (10,037,274 | ) | 637.2 | % | ||||||||
| Provision for income taxes | (22,666 | ) | - | (22,666 | ) | - | ||||||||||
| Loss from continuing operations | (11,589,784 | ) | (1,575,176 | ) | (10,014,608 | ) | 635.8 | % | ||||||||
| Loss from continuing operations attributable to GD Culture Group Limited | (11,305,008 | ) | (1,472,691 | ) | (9,832,317 | ) | 667.6 | % | ||||||||
| Loss from continuing operations attributable to non-controlling interest | (284,776 | ) | (102,485 | ) | (182,291 | ) | 177.9 | % | ||||||||
| Discontinued operations: | ||||||||||||||||
| Loss from discontinued operations | - | (2,132,161 | ) | 2,132,161 | (100 | )% | ||||||||||
| Loss on disposal, net of taxes | - | (230 | ) | 230 | (100 | )% | ||||||||||
| Net Loss | $ | (11,589,784 | ) | $ | (3,707,567 | ) | $ | (7,882,217 | ) | 212.6 | % | |||||
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Revenues
The Company’s revenue consists of software copyright. Total revenues decreased by approximately $150,000 to $nil for the nine months ended September 30, 2024, compared to approximately $150,000 for the nine months ended September 30, 2023. The decrease was mainly due to no sales of software copyright in 2024.
Gross Profit
The Company’s gross profit decreased by $150,000 to nil, during the nine months ended September 30, 2024, from $150,000 for the nine months ended September 30, 2023. The decrease was due to no sales of software copyright in 2024.
Operating Expenses
The Company’s operating expenses include selling and marketing (“S&M”) expenses, general and administrative (“G&A”) expenses, research and development (“R&D”) expenses. S&M expenses increased to $2.4 million for the nine months ended September 30, 2024, compared to $nil for the nine months ended September 30, 2023. The increase was mainly due to the Company increased inputs on digital human and e-commerce live streaming marketing and advertising to improve its brand reputation, attract a large following on social media. G&A expenses increased by approximately $2.4 million from approximately $1.9 million for the nine months ended September 30, 2023 to approximately $4.3 million for the nine months ended September 30, 2024. The increase was mainly due to the combined impact of (i) the expansion of our administrative associated personnel cost, (ii) increase in operating and lease expenses for offices, (iii) increase in the professional service fee and (iv) amortization of intangible assets. R&D expenses increased to approximately $0.7 million for the nine months ended September 30, 2024, compared to nil for the nine months ended September 30, 2023. The increase was mainly due to the Company increased inputs on research and development about our artificial intelligence based digital human application, to create unconventional digital characters and customize digital humans to support the clients’ marketing efforts.
Other Income (Expenses)
The Company’s other income decreased by approximately $4.4 million during the nine months ended September 30, 2024, compared to $147,018 for the nine months ended September 30, 2023. The decrease was mainly due to the other-than-temporary impairment losses from convertible notes and intangible assets.
Loss from Continuing Operations
As a result of the foregoing, loss from continuing operations for the nine months ended September 30, 2024 was approximately $11.6 million, an increase of approximately 635.8%, from loss from continuing operations of approximately $1.6 million for the nine months ended September 30, 2023.
Net Loss
The Company’s net loss increased by approximately $7.9 million, or 212.6%, to approximately $11.6 million net loss for the nine months ended September 30, 2024, from approximately $3.7 million net loss for the nine months ended September 30, 2023. The increase was mainly due to the increase on operating expenses as described above and the other-than-temporary impairment losses from convertible notes and intangible assets.
Critical Accounting Policies and Estimates
The Company prepares its unaudited consolidated financial statements in accordance with U.S. GAAP. The preparation of these unaudited consolidated financial statements requires the Company to make estimates, assumptions and judgments that can significantly impact the amounts the Company reports as assets, liabilities, revenue, costs and expenses and the related disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable under the circumstances. The Company’s actual results could differ significantly from these estimates under different assumptions and conditions. The Company has identified the following key accounting estimates:
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Convertible Notes Receivable
The Company evaluated the terms of the DigiTrax Convertible Notes and the Liquid Convertible Notes (as defined in Note 12 of the unaudited consolidated financial statements) according to ASC 320 “Investments — Debt Securities” and concluded that the convertible notes should be classified as an available-for-sale security and measured at fair value. To evaluate the fair value of the available-for-sale security, the Company used the valuation methodology of income approach, which is determined by the future cash flow forecast. The fair value changes of these notes were recorded as accumulated other comprehensive income on the accompanying unaudited consolidated statements of operations and comprehensive loss for the three months ended as of the reporting period.
The Company evaluates quarterly whether AFS securities are other-than-temporarily impaired (OTTI) based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, the credit rating of the issuer or security, the failure of the issuer to make scheduled principal or interest payments, and the financial health and prospects of the issuer or security.
Declines in the value of AFS securities determined to be OTTI are recognized in earnings and included in other-than-temporary impairment losses. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if the Company will be required to sell the security prior to any anticipated recovery. If the Company determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the difference between the amortized cost and the current fair value. A debt security is also determined to be OTTI if the Company does not expect to recover the amortized cost of the security. However, in this circumstance, if the Company does not intend to sell the security and will not be required to sell the security, the impairment recognized in earnings equals the estimated credit loss as measured by the difference between the present value of expected cash flows and the amortized cost of the security. Expected cash flows are discounted using the security’s effective interest rate. An equity security is determined to be OTTI if the Company does not expect to recover the cost of the security. Declines in the value of AFS securities determined to be temporary are reported, net of tax, as other comprehensive earnings (losses) and included as a separate component of stockholders’ equity.
Impairment of long-lived assets
The Company’s determination of whether or not an indication of impairment exists at the cash generating unit level requires significant management judgment pertaining to intangible assets, including a software copyright of a broadcast game (the “Tribal Light”), 55 digital humans and a software copyright of AI Box, which are used for online living-stream, as well as the operating Right-of-use (“ROU”) assets, including the offices of the Company. Management considers both external and internal sources of information in assessing whether there are any indications that the Company’s intangible assets and ROU assets are impaired.
Due to limited potential economic benefits for varying reasons for the nine months ended September 30, 2024, the Company recognized impairment losses of $2,756,986 for the nine months ended September 30, 2024, to the software copyrights. Declines in the value of intangible assets determined to be OTTI are recognized in earnings and included in other-than-temporary impairment losses.
Recently Issued Accounting Pronouncements
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The new amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. The Company has evaluated and concluded that there’s no impact of the new guidance on the unaudited consolidated financial statements. The Company adopted ASU 2021-08 since January 1, 2024.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”, which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. This guidance also requires certain disclosures for equity securities subject to contractual sale restrictions. The new guidance is required to be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. This guidance is effective for fiscal years beginning after 15 December 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company has evaluated and concluded that there’s no impact of the new guidance on the unaudited consolidated financial statements. The Company adopted ASU 2022-03 since January 1, 2024.
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In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09), which requires disclosure of incremental income tax information within the rate reconciliation and expanded disclosures of income taxes paid, among other disclosure requirements. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company’s management does not believe the adoption of ASU 2023-09 will have a material impact on its financial statements and disclosures.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The purpose of the amendment is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. The Company will begin providing the enhanced reportable segment financial disclosures effective with its Annual Report on Form 10-K for the year ending December 31, 2024.
In December 2023, the FASB issued ASU 2023-08, Intangibles - Goodwill and Other - Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, which establishes accounting guidance for crypto assets meeting certain criteria. Bitcoin meets this criteria. The amendments require crypto assets meeting the criteria to be recognized at fair value with changes recognized in net income each reporting period. Upon adoption, a cumulative-effect adjustment is made to the opening balance of retained earnings as of the beginning of the annual reporting period of adoption. ASU 2023-08 is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The Company has evaluated and concluded that there’s no impact of the new guidance on the unaudited consolidated financial statements. The Company adopted ASU 2022-08 since January 1, 2024.
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 operations and comprehensive loss and statements of cash flows.
Liquidity and Capital Resources
As of September 30, 2024, the Company had $31,969 in its operating bank accounts and working capital of approximately $1.2 million. In October 2024, Mr. Xiaojian Wang, the Chief Executive Officer (“CEO”) of the Company, executed a Letter of Support in which he agreed to provide continuing financial support to the Company for a period of at least 12 months from the issuance date of the Company’s unaudited consolidated financial statements for the period ended September 30, 2024. On September 18, 2024 and September 20, 2024, the CEO lent $9,500 and $50,000, respectively, to the Company through two loan agreements, for working capital purposes. On October 4, 2024 and October 23, 2024, the CEO lent $50,000 and $200,000, respectively, to the Company through two loan agreements, for working capital purposes. Pursuant to the loan agreements, these loans are non-interest bearing and will be due on September 18, 2025, September 20, 2025, October 4, 2025 and October 23, 2025, respectively. Up to the date of the unaudited consolidated financial statements were issued, the Company received $309,500 in total from the CEO.
The Company also intends to raise additional debt or equity capital to fund future operations. There is no assurance that the Company will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. In addition, the Company has planned and implemented cost-cutting measures to reduce operating expenditures and loss. Management believes that the Company can adjust the pace of its business development and control operating expenses when necessary. Therefore, the Company assesses that current working capital, together with the letter of financial support from Mr. Xiaojian Wang, will be sufficient to meet its obligations for the next 12 months from the issuance date of this report. These unaudited consolidated financial statements are prepared on going concern basis.
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The following summarizes the key components of the Company’s cash flows for the nine months ended September 30, 2024 and 2023.
For the Nine Months ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (5,324,096 | ) | $ | (6,465,350 | ) | ||
| Net cash used in investing activities | (650,000 | ) | (5,009,617 | ) | ||||
| Net cash provided by financing activities | 830,533 | 12,733,759 | ||||||
| Effect of exchange rate change on cash and cash equivalents | 14 | (752 | ) | |||||
| Net change in cash and cash equivalents | $ | (5,143,549 | ) | $ | 1,258,040 | |||
As of September 30, 2024 and December 31, 2023, the Company had cash in the amount of $31,969 and $5,175,518, respectively. As of September 30, 2024 and December 31, 2023, $11,429 and $211,222 were deposited with one financial institution located in the PRC, respectively. As of September 30, 2024 and December 31, 2023, $20,540 and $4,964,296 were deposited with one financial institution located in the United States, respectively.
Operating activities
Net cash used in operating activities was approximately $5.3 million for the nine months ended September 30, 2024, as compared to approximately $6.5 million net cash used in operating activities for the nine months ended September 30, 2023. Net loss for the nine months ended September 30, 2024 was approximately $11.5 million, as compared to approximately $3.7 millions for the nine months ended September 30, 2023. Adjustments to reconcile net loss to net cash used in operating activities increased by approximately $2.9 million, mainly due to the increase on other-than-temporary impairment losses from convertible note and intangible assets, partially impairment loss from goodwill.
Investing activities
Net cash used in investing activities was approximately $0.7 million for the nine months ended September 30, 2024, as compared to approximately $5.0 million for the nine months ended September 30, 2023. Net cash used in investing activities decreased by approximately $4.3 million, due to no purchase of intangible assets and no purchase of convertible notes in 2024, partially offset by the loan to a third party.
Financing activities
Net cash provided by financing activities was approximately $0.8 million for the nine months ended September 30, 2024, as compared to approximately $12.7 million net cash provided by financing activities for the nine months ended September 30, 2023. Net cash provided by financing activities decreased by approximately $11.9 million, due to no significant proceeds from issuance of comment stock in 2024.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
Credit risk is one of the most significant risks for the Company’s business.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. Cash held at major financial institutions located in the PRC are not insured by the government. While we believe that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company normally require prepayment from the customers prior to begin production or delivery products. The Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.
In measuring the credit risk of our sales to our customers, the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.
Liquidity Risk
As of September 30, 2024, the Company had $31,969 in its operating bank accounts and working capital of approximately $1.2 million. In October 2024, Mr. Xiaojian Wang, the Chief Executive Officer of the Company(“CEO”), executed a Letter of Support in which he agreed to provide continuing financial support to the Company for a period of at least 12 months from the issuance date of the Company’s unaudited consolidated financial statements for the period ended September 30, 2024. On September 18, 2024 and September 20, 2024, the CEO lent $9,500 and $50,000, respectively, to the Company through two loan agreements, for working capital purposes. On October 4, 2024 and October 23, 2024, the CEO lent $50,000 and $200,000, respectively, to the Company through two loan agreements, for working capital purposes. Pursuant to the loan agreements, these loans are non-interest bearing and will be due on September 18, 2025, September 20, 2025, October 4, 2025 and October 23, 2025, respectively. Up to the date of the unaudited consolidated financial statements were issued, the Company received $309,500 in total from the CEO.
The Company also intends to raise additional debt or equity capital to fund future operations. There is no assurance that the Company will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. In addition, the Company has planned and implemented cost-cutting measures to reduce operating expenditures and loss. Management believes that the Company can adjust the pace of its business development and control operating expenses when necessary. Therefore, the Company assesses that current working capital, together with the letter of financial support from Mr. Xiaojian Wang, will be sufficient to meet its obligations for the next 12 months from the issuance date of this report. These unaudited consolidated financial statements are prepared on going concern basis.
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Inflation Risk
The Company is also exposed to inflation risk. Inflationary factors, such as increases in raw material and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the selling prices of our products do not increase with such increased costs.
Foreign Currency Risk
A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer, President and Chief Financial Officer (the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report.
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the information included in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 before making an investment in our common stock. Our business, financial condition, results of operations, or prospects could be materially and adversely affected if any of these risks occurs, and as a result, the market price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There are no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 10, 2023, Highlight WFOE, Beijing Hehe, and a third party, established SH Xianzhui under the laws of the People’s Republic of China for social media marketing. Highlight WFOE owns 60% of the equity interest of SH Xianzhui, Beijing Hehe owns 20% of the equity interest of the Joint Venture and the third party owns the remaining 20% of the equity interest of the Joint Venture.
On October 27, 2023, the Company entered into an equity purchase agreement with Highlight WFOE and Beijing Hehe, which was amended on November 10, 2023 (such equity purchase agreement, as amended, the “Agreement” for purpose of this section), pursuant to which Highlight WFOE agreed to purchase 13.3333% equity interest in SH Xianzhui from Beijing Hehe and the Company agreed to issue 400,000 shares of common stock of the Company, valued at $2.7820 per share, the average closing bid price of the common stock of GDC as of the five trading days immediately preceding the date of the Agreement, to Beijing Hehe or its assigns. On January 11, 2024, the Company issued the 400,000 shares of its common stock to Beijing Hehe and the transaction was completed. As of the date of this Quarterly Report on Form 10-Q, the Company owns 73.3333% of the total equity interest of Shanghai Xianzhui.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
|
Exhibit Number |
Description | |
| 31.1 | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| 31.2 | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| 32.1 | Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. | |
| 32.2 | Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. | |
| 101.INS | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 14, 2024.
| GD CULTURE GROUP LIMITED | ||
| Date: November 14, 2024 | By: | /s/ Xiaojian Wang |
| Name: | Xiaojian Wang | |
| Title: | Chief Executive Officer, President and | |
| Chairman of the Board | ||
| Date: November 14, 2024 | By: | /s/ Zihao Zhao |
| Name: | Zihao Zhao | |
| Title: | Chief Financial Officer and Secretary | |
|
(Principal Financial Officer and Principal Accounting Officer) | ||
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