# GD Culture Group Ltd: Form 10-Q for the period ended Sep 30, 2023

- Company: [GD Culture Group Ltd](/companies/gdc.md) (CIK 1641398)
- Form: 10-Q
- Filed: 2023-11-20
- Accepted by EDGAR: Nov 20, 2023, 12:33 ET
- Period: 2023-09-30
- Accession: 0001213900-23-088602
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1641398/000121390023088602/f10q0923_gdculture.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1641398/000121390023088602/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $150.0k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $3.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $3.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$3.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$3.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $52 | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $52 | us-gaap:InterestExpense |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$3.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$3.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$1.16 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$1.47 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$1.16 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$1.47 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 3,053,563 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 2,447,446 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$6.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-09-30 | $1.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $6.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $13.9m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $330.7k | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $1.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $6.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 40,462 characters.

*The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with our unaudited condensed financial statements, and the notes to those unaudited condensed financial statements that are included elsewhere in this Report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.*

*Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward- looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.*

*Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward- looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.*

Overview

GD Culture Group Limited, formerly known as JM Global Holding Company, TMSR Holding Company Limited and Code Chain New Continent Limited (“GDC” or the “Company”), focuses its business on three segments mainly through one of its subsidiaries, AI Catalysis Corp.: 1) AI-driven digital human creation and customization; 2) Live streaming and ecommerce 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.

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 use case, 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.

For e-Commerce and Live Streaming 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 launched a live-streamed game called "Trible Light." This game is owned by the company, and we independently operate it. Currently, the game is being livestreamed on TikTok (TikTok account: almplify001). In addition to "Trible Light," we have also introduced other licensed games on the same TikTok account, providing a diverse gaming experience for our players.

We generate our revenue primarily from: 1) Service revenue and advertising revenue from Digital Human Creation and Customization; 2) Products’ Sales revenue from social live streaming ecommerce business; and 3) Virtual paid gifts revenue from live streaming interactive gaming.

Our principal executive office is located at 810 Seventh Avenue, 22nd Floor, New York, NY 10019, and our telephone number is: +1-347-2590292.

#### Discontinued Business

Prior to September 28, 2022, we also conducted business through Wuge Network Games Co., Ltd. (“Wuge”). Makesi WFOE had a series of contractual arrangement with Wuge that established a VIE structure. For accounting purposes, Makesi WFOE was the primary beneficiary of Wuge. Accordingly, under U.S. GAAP, GDC treated Wuge as the consolidated affiliated entity and has consolidated Yuanma’s financial results in Wuge’s financial statements prior to September 28, 2022. Wuge focused its business on research, development and application of Internet of Things (IoT) and electronic tokens Wuge digital door signs. On September 28, 2022, Makesi WFOE entered into a termination agreement with Wuge and the shareholders of Wuge to terminate the VIE agreements and to cancel the shares previously issued to the shareholders of Wuge, based on the average closing price of $0.237 per share of the Company during the 30 trading days immediately prior to the date of the termination agreement. As a result of such termination, the Company no longer treats Wuge as a consolidated affiliated entity or consolidates the financial results and balance sheet of Wuge in the Company’s consolidated financial statements under U.S. GAAP.

Prior to June 26, 2023, we had a subsidiary TMSR HK, which owns 100% equity interest in Makesi WFOE. Makesi WFOE had a series of contractual arrangement with Yuanma that established a VIE structure. For accounting purposes, Makesi WFOE was the primary beneficiary of Yuanma. Accordingly, under U.S. GAAP, GDC treated Yuanma as the consolidated affiliated entity and has consolidated Yuanma’s financial results in GDC’s financial statements prior to June 26, 2023. 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. The purchase price for the transaction contemplated by the Agreement was $100,000. The sale of TMSR HK included the sale of Makesi WFOE and Yuanma. None of TMSR HK, Makesi WFOE or Yuanma had any assets, employees or operation. The sale of TMSR HK did not have any material impact on the Company’s consolidated financial statements.

Prior to September 26, 2023, we 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 for a purchase price of $100,000. 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 consolidated financial statements under U.S. GAAP.

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 International, LLC as its new independent registered public accounting firm to audit the Company’s financial statements.

Investment in SH Xianzhui

On August 10, 2023, Highlight WFOE, Beijing Hehe Property Management Co., Ltd. (“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 SH Xianzhui and the third party owns the remaining 20% of the equity interest of SH 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 SH Xianzhui”), pursuant to which the 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. The closing of the transaction shall take place within thirty (30) days from the execution of the Agreement. The Agreement is effective for thirty (30) days from the date of the Agreement, which can be extended for additional thirty (30) days upon all parties’ written agreement. The Company or Highlight WFOE may terminate the Agreement at any time with a three (3) day advance written notice to Beijing Hehe.

November 2023 Registered Direct Offering

On November 1, 2023, the Company entered into a placement agency agreement (the “Placement Agency Agreement”), with Univest Securities, LLC (the “Placement Agent” or “Univest”). Pursuant to the Placement Agency Agreement, the Placement Agent agrees to use its reasonable best efforts to sell the Company’s common stock (the “Common Stock”) in a registered direct offering (the “Offering”). The Placement Agent has no obligation to buy any of the securities from us or to arrange for the purchase or sale of any specific number or dollar amount of securities.

In the Offering, (i) an aggregate of 1,436,253 shares of common stock (the “Common Shares”) of the Company, par value $0.0001 per share, (ii) pre-funded warrants to purchase up to an aggregate of 1,876,103 shares of common stock (the “Pre-Funded Warrants”, and the common stock underlying such warrants, the “Pre-Funded Warrant Shares”), and (iii) registered warrants to purchase up to an aggregate of 3,312,356 shares of common stock (the “Registered Warrants”, and the common stock underlying such warrants, the “Registered Warrant Shares”) are sold to certain purchasers (the “Purchasers”), pursuant to a securities purchase agreement, dated October 31, 2023 (the “Securities Purchase Agreement”). The purchase price of each Common Share is $3.019. The purchase price of each Pre-funded Warrant is $3.018, which equals the price per Common Share being sold in this Offering, minus $0.001. The Pre-funded Warrants will be exercisable immediately after issuance and will expire five (5) years from the date of issuance. The Registered Warrants will be exercisable immediately and will expire five (5) years from the date of issuance.

The Offering is 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.

The net proceeds from the Offering, after deducting placement agent discounts and commissions and estimated offering expenses payable by the Company, are approximately $9.05 million (assuming the Registered Warrants are not exercised). The Company intends to use the net proceeds from the Offering for working capital and general corporate purposes.

Pursuant to the Placement Agency Agreement, the Company has agreed to pay the Placement Agent a total cash fee equal to 7.0% of the aggregate gross proceeds received in the Offering. The Company also agreed to reimburse the Placement Agent certain out-of-pocket accountable expenses incurred in this Offering up to $150,000.

In concurrent with the Offering, on November 1, 2023, the Company entered into certain warrant exchange agreements (the “Warrant Exchange Agreements”) with certain holders of warrants issued by the Company on May 16, 2023 in a private placement (the “Existing Warrants”), to purchase up to 1,154,519 shares of the Company’s Common Stock (the “Holders”). Pursuant to the Warrant Exchange Agreements, the Holders shall surrender the Existing Warrants, and the Company shall cancel the Existing Warrants and shall issue to Holders pre-funded warrants to purchase up to 577,260 shares of the Company’s Common Stock (the “Exchange Warrants”). The Exchange Warrants were issued to Holders on November 3, 2023 and the warrant exchange closed on the same day.

On November 17, 2023, the Company entered into an amendment to the Securities Purchase Agreement with the Purchasers, pursuant to which Exhibit B to the Securities Purchase Agreement (form of Registered Warrants) was deleted and replaced with an amended and restated the Form of Registered Warrant, to remove Section 2(b) Adjustment Upon Issuance of Common Stock and Section 2(e) Other Events.

The Registered Warrants that were issued to Purchasers under the Securities Purchase Agreement were returned to and cancelled by the Company on November 17, 2023. Concurrently, the Company issued amended and restated Registered Warrants to each Purchaser.

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.

### Impact of the COVID-19 Pandemic

The COVID-19 pandemic did not have a material impact on our business or results of operation during the nine months ended September 30, 2023 and 2022. 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

### Three Months Ended September 30, 2023 vs. September 30, 2022

| Revenues | 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Enterprise brand management | - | - | - | N/A% |
| Software copyright | - | - | - | N/A% |
| Total revenues | - | - | - | N/A% |
| Cost of Revenues |  |  |  |  |
| Enterprise brand management service | - | - | - | N/A% |
| Software copyright | - | - | - | N/A% |
| Total cost of revenues | - | - | - | N/A% |
| Gross profit | - | - | - | N/A% |
| Operating expenses | 3,667,011 | 64,041 | 3,602,970 | 5,626.0% |
| Loss from operations | (3,667,011) | (64,041) | (3,602,970) | 5,626.0% |
| Other income, net | 46,839 | - | 46,839 | 100.0% |
| Loss before income tax from continuing operations | (3,620,172) | (64,041) | (3,556,131) | 5,552.9% |
| Provision for income taxes | - | - | - | N/A% |
| **Loss from continuing operations** | (3,620,172) | (64,041) | (3,556,131) | 5,552.9% |
| Net loss attributable to noncontrolling interest | (102,485) | - | (102,485) | (100.0)% |
| **Loss from continuing operations attributable to GD Culture Group Limited** | (3,517,687) | (64,041) | (3,453,646) | 5,392.9% |
| **Discontinued operations:** |  |  |  |  |
| Loss from discontinued operations | (10,358) | - | (10,358) | (100.0)% |
| Loss on disposal, net of taxes | (230) | (4,027,930) | 4,027,700 | (100.0)% |
| **Net Loss** | (3,528,275) | (4,091,971) | 563,696 | (13.8)% |

38

Operating Expenses

The Company’s operating expenses include selling, general and administrative (“SG&A”) expenses, and recovery of doubtful accounts.

SG&A expenses increased by approximately $3.6 million from approximately $0.1 million for the three months ended September 30, 2022 to approximately $3.7 million for the three months ended September 30, 2023. The increase was mainly due to the combined impact of (i) the reduction of impairment of prepayments, (ii) increase in professional service fees incurred for industry research and analysis and daily operation management, (iii) the expansion of our administrative associated personnel cost, and (iv) increase in operating and lease expenses for offices.

### Other Income, Net

The Company’s other income increased by approximately $47 thousand during the three months ended September 30, 2023, compared to nil for the three months ended September 30, 2022. The increase was due to the accrued interest for the investment in convertible notes.

Loss from Continuing Operations

As a result of the foregoing, loss from continuing operations for the three months ended September 30, 2023 was approximately $3.6 million, an increase of approximately 5552.9%, from approximately loss from continuing operations of $0.1 million for the three months ended September 30, 2022.

Net Loss

The Company’s net loss decreased by approximately $0.6 million, or 13.8%, to approximately $3.5 million net loss for the three months ended September 30, 2023, from approximately $4.1 million net loss for the same period in 2022. The decrease was mainly due to the combined impact of (i) the reduction of impairment of prepayments, (ii) increase in professional service fees incurred for industry research and analysis and daily operation management, (iii) the expansion of our administrative associated personnel cost, (iv) increase in operating and lease expenses for offices the reduction of impairment of prepayments, and (v) loss on disposal of Wuge in 2022.

Nine Months Ended September 30, 2023 vs. September 30, 2022

| Revenues | 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Enterprise brand management | - | - | - | N/A% |
| Software copyright | 150,000 | - | 150,000 | 100.0% |
| Total revenues | 150,000 | - | 150,000 | 100.0% |
| Cost of Revenues |  |  |  |  |
| Enterprise brand management service | - | - | - | N/A% |
| Software copyright | - | - | - | N/A% |
| Total cost of revenues | - | - | - | N/A% |
| Gross profit | 150,000 | - | 150,000 | 100.0% |
| Operating expenses | 3,942,947 | 19,749,408 | (15,806,461) | (80.0)% |
| Loss from operations | (3,792,947) | (19,749,408) | 15,956,461 | (80.8)% |
| Other income, net | 147,018 | - | 147,018 | 100.0% |
| Loss before income tax from continuing operations | (3,645,929) | (19,749,408) | 16,103,479 | (81.5)% |
| Provision for income taxes | - | - | - | N/A% |
| **Loss from continuing operations** | (3,645,929) | (19,749,408) | 16,103,479 | (81.5)% |
| Net loss attributable to noncontrolling interest | (102,485) | - | (102,485) | (100.0)% |
| **Loss from continuing operations attributable to GD Culture Group Limited** | (3,543,444) | (19,749,408) | 16,205,964 | (82.1)% |
| **Discontinued operations:** |  |  |  |  |
| Loss from discontinued operations | (61,408) | 303,089 | (364,497) | (120.3)% |
| Loss on disposal, net of taxes | (230) | (4,027,930) | 4,027,700 | (100.0)% |
| **Net Loss** | (3,605,082) | (23,474,249) | 19,869,167 | (84.6)% |

39

Revenues

The Company’s revenue consists of software copyright. Total revenues increased by $0.2 million, compared to nil for the nine months ended September 30, 2022. The increase was mainly due to the start of operation of AI Catalysis.

Gross Profit

The Company’s gross profit increased by $0.2 million, during the nine months ended September 30, 2023, compared to nil for the nine months ended September 30, 2022. The increase was due to the start of operation of AI Catalysis.

Operating Expenses

The Company’s operating expenses include selling, general and administrative (“SG&A”) expenses, and recovery of doubtful accounts.

SG&A expenses decreased by approximately $15.8 million from approximately $19.7 million for the nine months ended September 30, 2022 to approximately $3.9 million for the nine months ended September 30, 2023. The decrease was mainly due to the combined impact of (i) the reduction of impairment of prepayments, (ii) increase in professional service fees incurred for industry research and analysis and daily operation management, (iii) the expansion of our administrative associated personnel cost, (iv) increase in operating and lease expenses for offices, and (v) the reduction of impairment of goodwill.

### Other Income, Net

The Company’s other income increased by approximately $147 thousand during the nine months ended September 30, 2023, compared to nil for the nine months ended September 30, 2022. The increase was due to the accrued interest for the investment in convertible notes.

Loss from Continuing Operations

As a result of the foregoing, loss from continuing operations for the nine months ended September 30, 2023 was approximately $3.6 million, a decrease of approximately $16.1 million, or approximately 81.5%, from approximately loss from operations of $19.7 million for the nine months ended September 30, 2022. The decrease was mainly due to the combined impact of (i) the reduction of impairment of prepayments, (ii) increase in professional service fees incurred for industry research and analysis and daily operation management, (iii) the expansion of our administrative associated personnel cost, (iv) increase in operating and lease expenses for offices, and (v) the reduction of impairment of goodwill.

Net Loss

The Company’s net loss decreased by approximately $19.9 million, or 84.6%, to approximately $3.6 million net loss for the nine months ended September 30, 2023, from approximately $23.5 million net loss for the same period in 2022. The decrease was mainly due to the combined impact of (i) the reduction of impairment of prepayments, (ii) increase in professional service fees incurred for industry research and analysis and daily operation management, (iii) the expansion of our administrative associated personnel cost, (iv) increase in operating and lease expenses for offices, and (v) the reduction of impairment of goodwill.

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our unaudited condensed consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our unaudited condensed consolidated financial statements.

#### Cash and cash equivalents

The Company considers certain short-term, highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. Cash and cash equivalents primarily represent bank deposits and fixed deposits with maturities of less than three months.

#### Investments

The Company purchases certain liquid short term investments such as money market funds and or other short-term debt securities marketed by large financial institutions. These investments are not insured against loss of principal. These investments are accounted for as financial instruments that are marked to fair market value at the end of each reporting period. As result of their short maturities, and limited risk profile, at times, their amortized carrying cost may be the best approximation their fair value.

#### Accounts receivable, net

Accounts receivable include trade accounts due from customers. An allowance for doubtful accounts may be established and recorded based on management’s assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

#### Prepayments

Prepayments are funds deposited or advanced to outside vendors for future inventory purchases. As a standard practice in China, many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis. This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.

#### Fair value measurement

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by us. The Company considers the carrying amount of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities, customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature.

The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:

- Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
- Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
- Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

#### Revenue recognition

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue, other than warranty revenues, was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. However, the impact of the Company’s warranty revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are primarily recognized at a point in time.

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition except its warranty revenues.

An entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange. Agent arrangements, where the entity simply arranges but does not control the goods or services being transferred to the customer, will result in the recognition of the net amount the entity is entitled to retain in the exchange.

Revenues from digital doors signs are recognized at a point in time when legal title and control over the sign is transferred to the customer. Management has determined that for the sales of digital door signs there is a single performance obligation that is met when the aforementioned control is transferred. Typically, customers make payment for the product in advance; the Company will record the payment as contract liabilities under the liability account customer deposits until the Company delivers the product by transferring control. Such revenues are recognized at a point in time after all performance obligations are satisfied under the new five-step model.

Payments received prior to the relevant criteria for revenue recognition are met, are recorded as customer deposits.

#### Gross versus Net Revenue Reporting

Starting from July 2016, in the normal course of the Company’s trading of industrial waste materials business, the Company directly purchases the processed industrial waste materials from the Company’s suppliers under the Company’s specifications and drop ships the materials directly to the Company’s customers. The Company would inspect the materials at its customers’ site, during which inspection it temporarily assumes legal title to the materials, and after which inspection legal title is transferred to its customers. In these situations, the Company generally collects the sales proceeds directly from the Company’s customers and pay for the inventory purchases to the Company’s suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the new accounting guidance for principal-agent considerations. Since the Company is the primary obligor and is responsible for (i) fulfilling the processed industrial waste materials delivery, (ii) controlling the inventory by temporarily assume legal title to the materials after inspecting the products from our vendors before passing the materials to our customers, and (iii) bearing the back-end risk of inventory loss with respect to any product return from the Company’s customers, the Company has concluded that it is the principal in these arrangements, and therefore report revenues and cost of revenues on a gross basis.

Recently Issue Accounting Pronouncements

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We do not believe the adoption of this ASU would have a material effect on our consolidated financial statements.

We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.

Liquidity and Capital Resources

The Company has funded working capital and other capital requirements primarily by equity contributions, loans from shareholders, cash flow from operations, short term bank loans, loans from third parties. Cash is required to repay debts and pay salaries, office expenses, income taxes and other operating expenses. As of September 30, 2023, our net working capital was approximately $6.3 million and is expected to continue to generate cash flow by operations from the acquisitions of new companies in the twelve months period.

We believe that current levels of cash and cash flows from operations will be sufficient to meet its anticipated cash needs for at least the next twelve months from the date the consolidated financial statements to be issued. However, it may need additional cash resources in the future if it experiences changed business conditions or other developments, and may also need additional cash resources in the future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed the Company’s amounts of cash and cash equivalents on hand, the Company may seek to issue debt or equity securities or obtain additional credit facility.

The following summarizes the key components of the Company’s cash flows for the nine months ended September 30, 2023 and 2022.

|  | For the Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash used in by operating activities | $(6,465,350) | $(966,745) |
| Net cash used in investing activities | (5,009,617) | (12,275,607) |
| Net cash provided by financing activities | 12,733,759 | - |
| Effect of exchange rate change on cash | (752) | (1,095,699) |
| Net change in cash | $1,258,040 | $(14,338,051) |

As of September 30, 2023 and December 31, 2022, the Company had cash in the amount of $1.6 million and $0.4 million, respectively. As of September 30, 2023 and December 31, 2022, $1.1 million and $0.2 million and were deposited with various financial institutions located in the PRC, respectively. As of September 30, 2023 and December 31, 2022, $0.5 million and $0.2 million were deposited with one financial institution located in the United States, respectively.

#### Operating activities

Net cash used in operating activities was approximately $6.5 million for the nine months ended September 30, 2023, as compared to approximately $1.0 million net cash used in operating activities for the September 30, 2022. Net cash used in operating activities was mainly due to the increase of approximately $4.6 million of prepayments, the increase of $0.1 million of prepaid expense-related party, the decrease of approximately $0.2 million of other payables-related parties, and the increase of approximately $0.1 million of customer deposits.

#### Investing activities

Net cash used in investing activities was $5.0 million for the nine months ended September 30, 2023, as compared to approximately $12.3 million net cash used in investing activities for the nine months ended September 30, 2022. Net cash used in investing activities was mainly due to the purchase of intangible assets with the amount of $2.5 million and investment in convertible notes of Liquid Marketplace Corp and DigiTrax Entertainment Inc. with the amount of $2.5 million.

#### Financing activities

Net cash provided by financing activities was $12.7 million for the nine months ended September 30, 2023, as compared to nil net cash used in financing activities for the nine months ended September 30, 2022. Net cash provided by financing activities was mainly due to the increase of approximately $8.6 million of issuance of common stock and contribution by noncontrolling shareholder with the amount of $4.1 million.

## Market risk

As filed, 3,224 characters.

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

The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.

Inflation Risk

The Company is also exposed to inflation risk. Inflationary factors, such as increases in raw material and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the selling prices of our products do not increase with such increased costs.

Foreign Currency Risk

A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through 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.

## Controls and procedures

As filed, 1,551 characters.

Under the supervision and with the participation of our management, including our Chief Executive Officers, 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.

## Risk factors

As filed, 1,305 characters.

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, 2022 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, 2022. 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.

Filed Nov 20, 2023.
Source: SEC EDGAR, the filing index for accession 0001213900-23-088602. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.