QDMI 10-Q
QDM International Inc. (QDMI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ________ to ________.
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (IRS Employer | |
| of incorporation or organization) | Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
+86 (
(Registrant’s telephone number, including area code)
| N/A |
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of
the Act:
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 Data 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 ☐
As of February 14, 2023, there were shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding.
QDM INTERNATIONAL INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2022
TABLE OF CONTENTS
| Cautionary Note Regarding Forward-Looking Statements | ii | |
| PART I – FINANCIAL INFORMATION | 1 | |
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 |
| Item 4. | Controls and Procedures | 20 |
| PART II – OTHER INFORMATION | 21 | |
| Item 1. | Legal Proceedings | 21 |
| Item 1A. | Risk Factors | 21 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 21 |
| Item 3. | Defaults Upon Senior Securities | 21 |
| Item 4. | Mine Safety Disclosures | 21 |
| Item 5. | Other Information | 21 |
| Item 6. | Exhibits | 21 |
| SIGNATURES | 22 | |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”), including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. These statements are based on management’s current expectations, but actual results may differ materially due to various factors, including, but not limited to:
| ● | the impact (including travel and entry restrictions and quarantine) of public health epidemics, including the COVID-19 pandemic in China, Hong Kong and the rest of the world, on the market we operate in and our business, results of operations and financial condition; | |
| ● | the impact of political uncertainty and social unrest in Hong Kong and laws, rules and regulations of the Chinese government aimed at addressing such unrest; | |
| ● | the market for our services in Hong Kong and Mainland China; | |
| ● | our expansion and other plans and opportunities; | |
| ● | our future financial and operating results, including revenues, income, expenditures, cash balances and other financial items; | |
| ● | current and future economic conditions in Hong Kong and China; | |
| ● | the future growth of the Hong Kong insurance industry as a whole and the professional insurance intermediary sector in particular; | |
| ● | our ability to attract customers, further enhance our brand recognition; | |
| ● | our ability to hire and retain qualified management personnel and key employees in order to enable them to develop our business; | |
| ● | changes in other applicable laws or regulations in Hong Kong related to or that could impact our business; | |
| ● | our management of business through a U.S. publicly-traded and reporting company and the general reputation and potential scrutiny of U.S. publicly-traded companies with their principal operations in Hong Kong and China; and | |
| ● | other assumptions regarding or descriptions of potential future events or circumstances described in this Report underlying or relating to any forward-looking statements. |
ii
The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.
iii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QDM INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31 AND MARCH 31, 2022
| December
31, 2022 |
March
31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Deferred assets | ||||||||
| Total current assets | ||||||||
| Right of use assets | ||||||||
| Long-term prepaids | ||||||||
| Property and equipment, at cost, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable & accrued liabilities | $ | $ | ||||||
| Lease liabilities - current | ||||||||
| Due to related parties | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities – non current | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity deficit: | ||||||||
| Preferred stock, $ par value, shares authorized, and issued and outstanding, respectively | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and and shares outstanding, respectively | ||||||||
| Subscription receivable | ( |
) | ( |
) | ||||
| Treasury stock, and shares at cost | ( |
) | ( |
) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Accumulated other comprehensive income | ||||||||
| Total stockholders’ deficit | ( |
) | ( |
) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
1
QDM INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2022 AND 2021
| For
the Three Months Ended December 31, | For
the Nine Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| General & administrative expenses | $ | $ | $ | $ | ||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expense | ||||||||||||||||
| Finance costs | ( | ) | ||||||||||||||
| Other (income) expense, net | ( | ) | ( | ) | ||||||||||||
| Total other expense (income) | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive loss | ||||||||||||||||
| Currency translation adjustment | ( | ) | ||||||||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common stock: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average basic & diluted shares outstanding: | ||||||||||||||||
| Preferred stocks | ||||||||||||||||
| Common | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
QDM INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICIT
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2022 AND 2021
| Preferred | Common | Additional | Accumulated Other |
|||||||||||||||||||||||||||||||||||||||||
| Preferred | Common | Treasury | Stock | Stock | Treasury | Paid-in | Subscription | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Amount | Amount | Amount | Capital | Receivable | Deficit | Income | Total | ||||||||||||||||||||||||||||||||||
| Balance September 30, 2021(unaudited) | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Forgiveness of shareholder advances | ||||||||||||||||||||||||||||||||||||||||||||
| Share issuance due to reverse split round up | ||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 (Unaudited) | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||||||||||
| Balance September 30, 2022(unaudited) | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Balance December 31, 2022 (Unaudited) | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Common | Additional | Other | |||||||||||||||||||||||||||||||||||||||||
| Preferred | Common | Treasury | Stock | Stock | Treasury | Paid-in | Subscription | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Amount | Amount | Amount | Capital | Receivable | Deficit | Income | Total | ||||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Share offering costs | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Conversion to common stocks | ( |
) | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Common stock issued | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Forgiveness of shareholder advances | ||||||||||||||||||||||||||||||||||||||||||||
| Share issuance due to reverse-split round up | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 (Unaudited) | 299,993 | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||||||||||||
| Balance March 31, 2022 | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Investment from stockholder | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2022 (Unaudited) | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
QDM INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2022 AND 2021
| December
31, 2022 |
December
31, 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Changes in working capital: | ||||||||
| Accounts receivable & other receivable | ( |
) | ( |
) | ||||
| Prepaid expenses | ||||||||
| Accounts payable & accrued liabilities | ||||||||
| Due to a related party | ||||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( |
) | ||||||
| Net cash used in investing activities | ( |
) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds borrowed from related parties | ||||||||
| Payments to related parties | ( |
) | ||||||
| Share issuance proceeds | ||||||||
| Deferred costs related to equity financing | ( |
) | ( |
) | ||||
| Contribution from stockholders | ||||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | ||||||||
| NET INCREASE (DECREASE) IN CASH | ||||||||
| CASH, BEGINNING OF PERIOD | $ | $ | ||||||
| CASH, END OF PERIOD | ||||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Non-cash transaction | ||||||||
| Debt forgiveness by shareholder | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
4
QDM International Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and principal activities
QDM International Inc. (“QDM,” and collectively with its subsidiaries, the “Company”) was incorporated in Florida in March 2020 and is the successor to 24/7 Kid Doc, Inc. (“24/7 Kid”), which was incorporated in Florida in November 1998. The Company conducts its business through an indirectly wholly owned subsidiary, YeeTah Insurance Consultant Limited (“YeeTah”), a licensed insurance brokerage company located in Hong Kong, China. YeeTah sells a wide range of insurance products, consisting of two major categories: (1) life and medical insurance, such as individual life insurance; and (2) general insurance, such as automobile insurance, commercial property insurance, liability insurance, homeowner insurance. In addition, as a Mandatory Provident Fund (“MPF”) Intermediary, YeeTah also assists its customers with their investment through the MPF and the Occupational Retirement Schemes Ordinance schemes (“ORSO”) in Hong Kong, both of which are retirement protection schemes set up for employees.
On October 21, 2020, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with QDM Holdings Limited, a BVI company (“QDM BVI”), and Huihe Zheng, the sole shareholder of QDM BVI (the “QDM BVI Shareholder”), who is also the Company’s principal stockholder, Chairman and Chief Executive Officer, to acquire all the issued and outstanding capital stock of QDM BVI in exchange for the issuance to the QDM BVI Shareholder 30,000 shares ( shares before the Reverse Split (as defined below)) of a newly designated Series C Convertible Preferred Stock, par value $ per share (the “Series C Preferred Stock”), with each Series C Preferred Stock initially being convertible into 11 shares of the Company’s common stock, par value $ per share, subject to certain adjustments and limitations (the “Share Exchange”). The Share Exchange closed on October 21, 2020.
As a result of the consummation of the Share Exchange, the Company acquired all the issued and outstanding capital stock of QDM BVI and its subsidiaries, QDM Group Limited, a Hong Kong corporation and wholly owned subsidiary of QDM BVI (“QDM HK”) and YeeTah.
The Company was a shell company prior to the reverse acquisition which occurred as a result of the consummation of the transaction contemplated by the Share Exchange Agreement, and QDM BVI was a private operating company. The reverse acquisition by a non-operating public shell company of a private operating company typically results in the owners and management of the private company having actual or effective voting and operating control of the combined company. Therefore, the reverse acquisition is considered a capital transaction in substance. In other words, the transaction is a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell company accompanied by a recapitalization. Therefore, the acquisition was accounted for as a recapitalization and QDM BVI is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of QDM BVI have been brought forward at their book value and no goodwill has been recognized.
Accordingly, the reverse acquisition has been treated as a corporate restructuring (reorganization) of entities under common control and thus the current capital structures of QDM BVI and its wholly-owned subsidiary QDM HK and its wholly-owned subsidiary, YeeTah, have been retrospectively presented in prior periods as if such structures existed at that time and in accordance with ASC 805-50-45-5.
As a result of the Share Exchange, the Company ceased to be a shell company.
5
On November 3, 2021, the
Company acquired
Going Concern
The consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred a loss since inception resulting in an accumulated deficit as of December 31, 2022. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company generating revenue and profit in the future and/or to obtain necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months primarily through financings from the Company’s major stockholder, although the Company may seek other sources of funding, including public and private offerings of securities.
These consolidated financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a “going concern.” While management believes that the actions already taken or planned, including adjusting its operating expenditures and obtaining financial supports from its principal stockholder, will mitigate the adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Company were unable to continue as a “going concern,” then substantial adjustments would be necessary to the reported amounts of its liabilities and assets, the reported expenses and the consolidated balance sheet classifications used.
2. Summary of significant accounting policies
Basis of Presentation
The Company’s unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The accompanying unaudited condensed financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown and are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2023. These unaudited condensed financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the Securities and Exchange Commission on June 29, 2022.
6
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with the U.S. GAAP requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses may be affected by the estimates that management is required to make. Actual results could differ from those estimates.
Foreign Currency and Foreign Currency Translation
The Company’s reporting currency is the United States Dollar (“US$” or “$”). The Company’s operations are principally conducted in Hong Kong where Hong Kong dollar is the functional currency. The functional currency of the Company’s two subsidiaries, Lutter Global Limited and QDMI Software Group Limited, is the Euro.
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in currencies other than the applicable functional currencies are translated into the functional currency at the prevailing rates of exchange at the balance sheet date. The resulting exchange differences are reported in the statements of operations and comprehensive loss.
The exchanges rates used for translation from Hong
Kong dollar to US$ was
The exchanges rates used for translation from Euro to US$ are as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Period-end spot rate | EUR
1 = US$ | EUR
1 = US$ | ||||||
| Average rate for nine months period | EUR
1 = US$ | EUR
1 = US$ |
Certain Risks and Concentration
The Company’s financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and receivables, and other assets. As of December 31, 2022, substantially all of the Company’s cash and cash equivalents were held in major financial institutions located in Hong Kong, which management considers to being of high credit quality.
Cash and Cash Equivalents
Cash and cash equivalents consist of petty cash on hand and cash held in banks, which are highly liquid and have original maturities of three months or less and are unrestricted as to withdrawal or use.
Accounts Receivable
Accounts receivable represents trade receivable and are recognized initially at fair value and subsequently adjusted for any allowance for doubtful accounts and impairment.
7
The Company makes impairment loss for bad and doubtful debts based on assessments of the recoverability of the trade and other receivables based on individual account analysis, including the current creditworthiness and the past collection history of each debtor. Impairments arise when there is an objective evidence indicate that the balances may not be collectible. The identification of bad and doubtful debts, in particular of a loss event, requires the use of judgment and estimates, which involve the estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. Based on management of customers’ credit and ongoing relationship, management makes conclusions whether any balances outstanding at the end of the period will be deemed uncollectible on an individual basis and on aging analysis basis. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the statements of operations and comprehensive loss. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
The Company historically did not have material bad
debts in accounts receivable. There were no bad debt expenses for the three and nine months ended December 31, 2022 and 2021 and there
was
Revenue Recognition
The Company generates revenue primarily by providing insurance brokerage services in Hong Kong. The Company sells insurance products underwritten by insurance companies operating in Hong Kong to its individual customers and is compensated for its services by commissions paid by insurance companies, typically based on a percentage of the premium paid by the insured.
ASC 606 provides for a five-step model for recognizing revenue from contracts with customers. These five steps include:
| (i) | Identify the contract | |
| (ii) | Identify performance obligations | |
| (iii) | Determine transaction price | |
| (iv) | Allocate transaction price | |
| (v) | Recognize revenue |
The Company enters into insurance brokerage contracts with customers (insurance companies). Performance obligation for these insurance brokerage contracts is to help insurance company customers to promote, coordinate and complete subscriptions of insurance policies offered by customers.
Under ASC 606, revenue is recognized when the customer obtains control of a good or service. A customer obtains control of a good or service if it has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. The transfer of control of the Company’s brokerage services generally occurs at a point in time on the effective date of the associated insurance contract when the policy transfers to the customer. The insurance policy entered between the insurance company and the insured customer generally contains a cool-off period of one to two months. When the cool-off period elapses and the insured customer does not withdraw from the insurance policy, the policy becomes effective. Once the transfer of control of a service occurs, the Company has satisfied its insurance brokerage performance obligation and recognizes revenue.
8
Fair Value Measurement
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value as follows:
| Level 1: | Quoted prices (unadjusted) in active markets for identical assets or liabilities. | ||
| Level 2: | Observable, market-based inputs, other than quoted prices, in active markets for identical assets or liabilities. | ||
| Level 3: | Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. | ||
The Company’s financial instruments include cash and cash equivalents, accounts receivable, due from related parties, accounts payable and accrued liabilities, lease liabilities and due to related party. The carrying amounts of these financial instruments approximate their fair values due to the short-term nature of these instruments.
The Company noted no transfers between levels during any of the periods presented. The Company did not have any instruments that were measured at fair value on a recurring nor non-recurring basis as of December 31, 2022.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and impairment. Depreciation of property and equipment is calculated on a straight-line basis, after consideration of expected useful lives and estimated residual values. The estimated annual deprecation rate of these assets are generally as follows:
| Category | Depreciation rate | Estimated residual value | ||||
| Office equipment | Nil | |||||
| Leasehold improvements | Nil |
Expenditures for maintenance and repairs are expensed as incurred. Gains and losses on disposals are the differences between net sales proceeds and carrying amount of the relevant assets and are recognized in the statements of operations and comprehensive loss.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the expected future undiscounted cash flows attributable to these assets. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the assets exceeds the expected discounted cash flows arising from those assets.
There were
9
Leases
Arrangements meeting the definition of a lease are classified as operating or finance leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.
In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components as permitted under ASC 842. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.
Taxation
Current income taxes are provided on the basis of net profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carryforwards and credits. 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 in accordance with the laws of the relevant taxing authorities. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in which temporary differences are expected to be reversed or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations and comprehensive income in the period of the enactment of the change.
The Company considers positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon its ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the Company has considered possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be reflected within the industry.
The Company recognizes a tax benefit associated with an uncertain tax position when, in its judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the Company initially and subsequently measures the tax benefit as the largest amount that the Company judges to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The Company’s liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The Company’s effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The Company classifies interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense.
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Stock-Based Compensation
The Company recognizes stock-based compensation in accordance with FASB ASC 718, Stock Compensation. ASC 718 requires that the cost resulting from all share-based transactions be recorded in the financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. ASC 718 also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.
Basic earnings per share is computed by dividing net income attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the period using the two-class method. Under the two-class method, net income is allocated between shares of common stock and other participating securities based on their participating rights. Net loss is not allocated to other participating securities if based on their contractual terms they are not obligated to share in the losses. Diluted earnings per share is calculated by dividing net income attributable to holders of common stock by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
Recently Issued Accounting Standards
The Company has reviewed all the recent accounting pronouncements issued to date of the issuance of these financial statements, and does not believe any of these pronouncements will have a material impact on the Company.
3. Deferred Asset
Deferred assets of $
4. Equity
Reverse Stock Split
On August 10, 2021, the Company
effected a reverse stock split of its common stock, without changing the par value per share, whereby
Common Stock
On April 29, 2021, the Company consummated a closing
of a “best efforts” self-underwritten public offering of its common stock, par value $ per share (the “Offering”),
in which the Company issued and sold an aggregate of 16,708 shares ( shares before the Reverse Split) of its common stock at a
price of $12 per share ($ before the Reverse Split) to certain investors, generating gross proceeds to the Company of $
There were no treasury stock transactions during the three and nine months ended December 31, 2022 and 2021.
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Additional paid-in-capital
During the three months ended December 31, 2021, Mr.
Zheng, the Company’s principal stockholder, Chairman and Chief Executive Officer, forgave $
On July 22, 2022, Huihe Zheng invested additional share capital of $ (HKD$) into Company’s subsidiary, YeeTah. The additional contribution was recorded into additional paid-in-capital.
Preferred Stock
On May 17, 2021, upon receipt of a conversion notice
from Huihe Zheng, the Company issued 134,976 shares ( shares before the Reverse Split) of the Company’s common stock upon
conversion of an aggregate of shares of Series C Preferred Stock, par value $ per share, at a conversion ratio of
5. Related Party Transaction
Related Parties
| Name of related parties | Relationship with the Company | |
| Siu Ping Lo | Responsible officer of YeeTah | |
| Huihe Zheng | Principal stockholder, Chief Executive Officer and Chairman of the Company | |
| YeeTah Financial Group Co., Ltd. (“YeeTah Financial”) | A company controlled by Siu Ping Lo | |
| Ouya Properties Group Ltd. (“OPG”) | A company controlled by Huihe Zheng |
Related Party Transactions
| (i) | During the three
and nine months ended December 31, 2022, YeeTah Financial charged YeeTah US$ | |
| (ii) | During the three and nine months
ended December 31, 2022, Huihe Zheng advanced US$ | |
| (ii) | During the three and nine months
ended December 31, 2022, OPG advanced US$ |
Due to Related Party Balance
The Company’s due to related party balance as of December 31 and March 31, 2022 is as follows:
| December 31, 2022 |
March 31, 2022 | |||||||
| US$ | US$ | |||||||
| Huihe Zheng | ||||||||
| OPG | ||||||||
| YeeTah Financial | ||||||||
| Total | ||||||||
The due to related party balance is unsecured, interest-free and due on demand.
Subscription Receivable Due from a Stockholder
The Company’s subscription receivable due from a stockholder balance as of December 31 and March 31, 2022 are as follows:
| December
31, 2022 | March 31, 2022 | |||||||
| US$ | US$ | |||||||
| Huihe Zheng | ||||||||
The due from stockholder balances represent the purchase price for shares of QDM BVI to be paid by Mr. Huihe Zheng. These due from stockholder balances at of the balance sheet dates were unsecured, interest-free and due on demand.
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6. Income Taxes
Hong Kong
Under the current Hong Kong Inland Revenue Ordinance,
the Company’s Hong Kong subsidiaries are subject to a
The Company did not have current income tax expenses for the three months and nine months ended December 31, 2022 and 2021 since it did not have taxable incomes in these two periods.
BVI
Under the current laws of the BVI, the Company is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no BVI withholding tax will be imposed.
Cyprus
Under the current laws of the Cyprus, the Company’s Cyprus subsidiary is subject to a standard income tax rate of 12.5% on income accrued or derived from all sources in Cyprus and abroad.
US
Under the current Florida state and US federal income
tax, the Company does not need to pay income taxes as Florida state does not levy income tax. The federal income tax is based on a flat
rate of
Uncertain tax positions
The Company evaluates each uncertain tax position
(including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated
with the tax positions. As of December 31, 2022, the Company did
7. Commitments and Contingencies
Other than an office lease with a lease term of 3 years that the Company entered into in February 2022 as below, the Company did not have significant commitments, long-term obligations, or guarantees as of December 31, 2022.
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Operating lease
The weighted average remaining lease term of the operating lease is 3 years and discount rate used for the operating lease is 4.9%.
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| Total future minimum lease payments | $ | |||
| Less: imputed interest | ( |
) | ||
| Total operating lease liability | $ | |||
| Less: operating lease liability - current | ||||
| Total operating lease liability – non current | $ |
Contingencies
The Company is subject to legal proceedings and regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome arising out of any such matter will have a material adverse effect on our business, financial position, cash flows or results of operations taken as a whole. As of December 31, 2022, the Company is not a party to any material legal or administrative proceedings.
8. Subsequent Events
In accordance with ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2022 through the date of issuance of the financial statements and has determined that it does not have any other material subsequent events to disclose in these financial statements except for the following.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is based on, and should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Report. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Report, and other factors that we may not know.
Overview
From 2016 to 2020, we were a telemedicine company that provides Connect-a-Doc telemedicine kits to schools. Our services aimed to provide alternatives to schools that desire to provide a higher level of healthcare to their students but are unable to keep a full-time school nurse available. In 2020 this business was discontinued and we became a non-operating “shell” company until our acquisition of YeeTah, as more fully described below.
On October 21, 2020, we entered into the Share Exchange Agreement with QDM BVI, and Huihe Zheng, the sole shareholder of QDM BVI, who is also our principal stockholder and serves as our Chairman and Chief Executive Officer, to acquire all the issued and outstanding capital stock of QDM BVI in exchange for the issuance to Mr. Zheng 30,000 shares (900,000 shares before the Reverse Split) of a newly designated Series C Preferred Stock, with each share of Series C Preferred Stock initially being convertible into 11 shares of our common stock, subject to certain adjustments and limitations. The Share Exchange closed on October 21, 2020.
As a result of the consummation of the Share Exchange, we acquired QDM BVI and its indirect subsidiary, YeeTah, an insurance brokerage company primarily engaged in the sales and distribution of insurance products in Hong Kong. Following the closing of the transaction, we have assumed the business operations of QDM BVI and its subsidiaries.
On November 3, 2021, the Company acquired 100% of the issued and outstanding shares of QDMS, a company incorporated on February 6, 2020 in Cyprus. The Company acquired QDMS through an intermediary holding company, LGL, which was incorporated on July 29, 2021 in the BVI. Before the acquisition, Huihe Zheng was the sole shareholder of QDMS. As part of the acquisition, Mr. Zheng sold all the shares of QDMS to LGL for a consideration of EUR5,000 in November 2021 and at the same time the sole shareholder of LGL, Mengting Xu, transferred all her shares in LGL to the Company for a consideration of USD$1.00. As a result, the Company acquired a 100% ownership of LGL, which, in turn, owns 100% of QDMS. QDMS plans to engage in the research and development of customer relationship management (“CRM”) software as a service (“SaaS”), with a business model derived from “customer-centered” CRM concept to improve enterprise-customers relationship. We plan to market QDMS’ SaaS services to our network of banks, securities companies, insurance companies and other financial services providers in Hong Kong and China.
Self-underwritten Offering
The Company filed a registration statement on Form S-1 with the SEC, as amended (the “Registration Statement”), pursuant to which the Company is offering up to 30,000,000 shares of its common stock on a best efforts/no minimum basis. The Registration Statement was declared effective by the SEC on January 27, 2023. The offering will terminate three months after the effectiveness of the Registration Statement.
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Impact of COVID-19
An outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and has subsequently been recognized as a pandemic by the World Health Organization. The COVID-19 pandemic has severely restricted the level of economic activity around the world. In response to this pandemic, the governments of many countries, states, cities and other geographic regions, including Hong Kong, have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.
Due to the COVID-19 pandemic, insurance brokers in Hong Kong have been greatly affected by the implementation of travel restrictions and social distancing measures. These restrictions and measures have resulted in a significant decrease in new business for insurance brokers, such as YeeTah, that rely on in-person consultations and storefronts for customer acquisition.
Customers from mainland China contributed to a large part of YeeTah’s commissions. Regulations require their physical presence in Hong Kong to complete the policy contract. However, due to the political turmoil and travel restrictions related to the COVID-19 epidemic, mainland Chinese customers dropped sharply. As a result, YeeTah’s revenue from commissions on new business decreased significantly during the pandemic. YeeTah’s commissions from renewal premiums were materially affected since the mainland Chinese customers were late in making the renewal payments due to inability to visit Hong Kong to make the payments. Most of YeeTah’s mainland customers do not have Hong Kong bank account and used to pay their premiums through credit card or in cash in person.
Results of Operations
Three and Nine Months Ended December 31, 2022 and 2021
The following table presents an overview of the results
of operations for the three and nine months ended
December 31, 2022 and 2021:
| For
the Three Months Ended December 31, |
For
the Nine Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Revenue | $ | 24,057 | $ | 24,601 | $ | 47,020 | $ | 54,819 | ||||||||
| Cost of sales | 16,508 | 24,601 | 39,471 | 54,819 | ||||||||||||
| Gross profit | 7,549 | — | 7,549 | — | ||||||||||||
| Operating expenses | ||||||||||||||||
| General & administrative expenses | $ | 76,875 | $ | 89,837 | $ | 248,322 | $ | 273,540 | ||||||||
| Total operating expenses | 76,875 | 89,837 | 248,322 | 273,540 | ||||||||||||
| Loss from operations | (69,326 | ) | (89,837 | ) | (240,773 | ) | (273,540 | ) | ||||||||
| Total other expense (income) | (252 | ) | (711 | ) | (2,278 | ) | 249 | |||||||||
| Net income | $ | (69,074 | ) | $ | (89,126 | ) | $ | (238,495 | ) | $ | (273,789 | ) | ||||
Revenue
Revenue decreased by approximately $7,800 or 14.2% and $544 or 2.2% respectively for the nine and three months ended December 31, 2022 as compared to the same periods of 2021. The decreases were mainly due to the decreases in the number of customers, primarily PRC mainland customers, resulting from the prolonged COVID-19 travel restriction and quarantine measures imposed by PRC and Hong Kong governments.
Cost of sales
The amounts decreased by approximately $15,000 or 28% and $8,000 or 32.9% respectively for the nine and three months ended December 31, 2022 as compared to the same periods of 2021. The decreases were due to the decreases of revenue. The percentage of decrease in costs of sales in the three months ended December 31, 2022 is significantly higher than the percentage of decrease of its revenue in the period due to the lower commission paid out due to the dealing with the different insurance products and brokers.
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General and administrative expenses
General and administrative expenses consist primarily of employee salaries, office rents, insurance costs, general office operating expenses (e.g., utilities, repairs and maintenance) and professional fees.
General and administrative expenses decreased by approximately $25,000 or 9.2% for the nine - months ended December 31, 2022 as compared to the same period of 2021. The change is primarily due to the fact that there were more professional expenses in relation to amendments to the Company’s Annual Report on Form 10-K in 2021.
General and administrative expenses decreased by approximately $13,000 or 14.4% for the three months ended December 31, 2022 as compared to the same period of 2021. The change is primarily due to the fact that there were more professional expenses in relation to amendments to the Company’s Annual Report on Form 10-K in 2021.
Net loss
As a result of the factors described above, net loss for the three months ended December 31, 2022 decreased by approximately $20,000 or 22.5% as compared to the same period of 2021.
As a result of the factors described above, net loss for the nine months ended December 31, 2022 decreased by approximately $35,000 or 12.9% as compared to the same period of 2021.
Foreign Currency Translation
The Company’s reporting currency is the United States dollar (“US$”). The Company’s operations are principally conducted in Hong Kong where the Hong Kong dollar is the functional currency. The functional currency of the Company’s two subsidiaries, Lutter Global Limited and QDMI Software Group Limited, is the Euro.
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange
rates prevailing on the transaction dates. Monetary assets and liabilities denominated in currencies other than the applicable functional
currencies are translated into the functional currency at the prevailing rates of exchange at the balance sheet date. The resulting exchange
differences are reported in the statements of operations and comprehensive loss.
The exchanges rate used for translation from Hong Kong dollar to US$ was 7.8000, a pegged rate determined by the linked exchange rate system in Hong Kong. This pegged rate was used to translate Company’s balance sheets, income statement items and cash flow items for both the three and nine months ended December 31, 2022 and 2021.
The exchanges rates used for translation from Euro to US$ are as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Period-end spot rate | EUR1= US$1.0698 | EUR1= US$1.1318 | ||||||
| Average rate for nine months period | EUR1= US$1.0310 | EUR1= US$1.1762 |
Liquidity and Capital Resources
We have financed our operations primarily through cash generated by operating activities, equity financings and advances from our principal stockholder. QDM is a holding company and conducts substantially all of its operations through YeeTah, which is its only entity that has operating cash inflows . Our expenses are paid directly either by YeeTah or our principal stockholder.
There have been no cash and any asset transactions between us and our subsidiaries since the Share Exchange. As of December 31 and March 31, 2022, we had $121,140 and $69,658, respectively, in cash and cash equivalents, which primarily consisted of cash deposited in banks.
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| Nine
Months Ended December 31, 2022 |
Nine
Months Ended December 31, 2021 | |||||||
| Net cash used in operating activities | $ | (227,517 | ) | $ | (247,698 | ) | ||
| Net cash used in investing activities | (14,628 | ) | — | |||||
| Net cash provided by financing activities | 293,316 | 339,070 | ||||||
| Effect of Exchange rate changes on cash | 311 | — | ||||||
| Net increase (decrease) in cash, cash equivalents | 51,482 | 91,372 | ||||||
| Cash and cash equivalents at beginning of period | 69,658 | 35,605 | ||||||
| Cash and cash equivalents at end of period | $ | 121,140 | $ | 126,977 | ||||
Our working capital requirements mainly comprise of commissions paid to technical representatives and referral fees, operating lease payments and employee salaries. Historically, our capital requirements were generally met by cash generated from our operations, equity financings and funding from our principal stockholder. In light of impact on our operations of the COVID-19 epidemic in China and Hong Kong, we undertook certain cost cutting measures, including but not limited to, relocating to a new office with a much lower rent and reducing the number of employees. Discretionary expenditures are also curtailed or reduced to save costs. In addition to adjusting our operating expenditures, we will continue to seek opportunities of equity financings and financial supports from our principal stockholder. Although historically we were successful in obtaining equity financings through the sales of our securities and obtaining loans from our principal stockholder, the availability of such financings when required is dependent on many factors beyond our control, such as the unforeseeable impact from COVID-19 and the recovery of the China and Hong Kong economy following the pandemic.
Operating Activities:
Net cash used in operating activities was approximately $228,000 for the nine months ended December 31, 2022, compared to net cash used in operating activities of $248,000 for 2021, representing a decrease of approximately $20,000 in the net cash outflow in operating activities. The decrease in net cash used in operating activities was primarily due to a decrease of net loss of $35,000 in the nine months ended December 31, 2022 as compared to the same period of 2021 and the following major working capital changes:
| (1) | Change in prepaid expenses resulted in an approximately $11,000 cash inflow for the nine months ended December 31, 2022 compared to an approximately $8,000 cash inflow for the same period of 2021, which led to an approximately $3,000 increase in net cash inflow from operating activities. | |
| (2) | Change in accounts payable and accrued liabilities resulted in an approximately $1,000 cash inflow for the nine months ended December 31, 2022 compared to an approximately $4,000 cash inflow for the same period of 2021, which led to an approximately $3,000 decrease in net cash inflow from operating activities. | |
| (3) | Change in due to a related party resulted in an approximately $4,000 cash inflow for the nine months ended December 31, 2022 compared to an approximately $20,000 cash inflow for the same period of 2021, which led to an approximately $16,000 decrease in net cash inflow from operating activities. | |
| (4) | Change in accounts receivable resulted in an approximately $11,000 cash outflow for the nine months ended December 31, 2022 compared to an approximately $6,000 cash outflow for the same period of 2021, which led to an approximately $5,000 increase in net cash outflow from operating activities. | |
| (5) | Change in non-cash item resulted in an approximately $6,000 cash inflow for the nine months ended December 31, 2022 compared to zero cash inflow for the same period of 2021, which led to an approximately $6,000 increase in net cash inflow from operating activities. |
Investing Activities:
Net cash used in investing activities was approximately $15,000 for the nine months ended December 31, 2022, which was solely attributable to acquisitions of fixed assets. There were no investing cash activities for the same period of 2021.
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Financing Activities:
Net cash generated from financing activities was approximately $293,000 for the nine months ended December 31, 2022, which was attributable to the net results of: (i) related-party advances of approximately $180,000; (ii) stockholder contribution of $150,000; (iii) prepayment of $37,000 issuance costs for future equity financing.
Net cash generated from financing activities was approximately $339,000 for the nine months ended December 31, 2021, which was attributable to the net results of: (i) related-party advances of approximately $363,000; (ii) share issuance proceeds of $200,500; (iii) repayment of related party of $200,500 and payment of $24,000 issuance costs for share issued in the period.
Material Commitments
We have no material commitments for the next twelve months. We will, however, require additional capital to meet our liquidity needs.
We had one office lease agreement and our lease commitments as of December 31, 2022 are summarized as follows:
Operating lease
| 2023 | $ | 10,542 | ||
| 2024 | 42,172 | |||
| 2025 | 35,143 | |||
| Total future minimum lease payments | $ | 87,857 | ||
| Less: imputed interest | (4,497 | ) | ||
| Total operating lease liability | $ | 83,360 | ||
| Less: operating lease liability - current | 38,954 | |||
| Total operating lease liability – non current | $ | 44,406 |
Critical Accounting Estimates
There were no areas requiring significant management judgments and estimates for the periods covered by this Report
Off-balance Sheet Commitments and Arrangements
As of December 31, 2022, the Company did not have any material off-balance sheet arrangements that had or were reasonably likely to have any effect on their respective financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
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 our Chief Executive Officer and Chief Financial Officer (together, the “Certifying Officers”), to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our 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 December 31, 2022 due to the material weakness in our internal control over financial reporting, which are indicative of many small companies with small staff: (i) lack of proper segregation of duties and risk assessment process; (ii) lack of formal documentation in internal controls over financial reporting; and (iii) lack of independent directors and an audit committee. We will devote resources to remediate these material weaknesses as we grow and such resources required for implementing proper internal controls for financial reporting are available.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2022 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.
We are not currently a party to any material legal or administrative proceedings. We may from time to time be subject to legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
Item 1A. Risk Factors.
We are a smaller reporting company and accordingly we are not required to provide information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Report:
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: February 14, 2023 | By: | /s/ Huihe Zheng |
| Huihe Zheng | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Dated: February 14, 2023 | By: | /s/ Tim Shannon |
| Tim Shannon | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
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