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 of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
| ||
| (Address of principal executive offices) | (Zip Code) |
(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: Common Stock, par value $0.0001
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 ☐ No
As of August 14, 2024, there were
QDM INTERNATIONAL INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2024
TABLE OF CONTENTS
| Page | ||
| 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 | 19 |
| PART II – OTHER INFORMATION | 20 | |
| Item 1. | Legal Proceedings | 20 |
| Item 1A. | Risk Factors | 20 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 |
| Item 3. | Defaults Upon Senior Securities | 20 |
| Item 4. | Mine Safety Disclosures | 20 |
| Item 5. | Other Information | 20 |
| Item 6. | Exhibits | 20 |
| SIGNATURES | 21 | |
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 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 and political conditions in Hong Kong and Mainland 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 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 |
| ● | other assumptions regarding or descriptions of potential future events or circumstances described in this Report underlying or relating to any forward-looking statements. |
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 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. 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.
ii
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
QDM INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30 AND MARCH 31, 2024
| June 30, 2024 | March 31, 2024 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Deferred offering cost | ||||||||
| Total current assets | ||||||||
| Right of use assets – operating lease | ||||||||
| Long-term prepaids | ||||||||
| Property and equipment, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable & accrued liabilities | $ | $ | ||||||
| Operating lease liabilities - current | ||||||||
| Income tax payable | ||||||||
| Due to related party | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities – non current | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| ( | ) | ( | ) | |||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
| * | Retrospectively applied for effect of the forward stock split on April 5, 2024 |
See accompanying notes to condensed consolidated financial statements.
1
QDM INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 2024 AND 2023
| For the Three Months Ended June 30, 2024 | For the Three Months Ended June 30, 2023 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenue | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| General & administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Income from operations | ||||||||
| Other income | ||||||||
| Interest expenses | ||||||||
| Other income | ( | ) | ( | ) | ||||
| Total other income | ( | ) | ( | ) | ||||
| Income before income taxes | ||||||||
| Current income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Other comprehensive loss | ||||||||
| Currency translation adjustment | ( | ) | ||||||
| Total comprehensive income | $ | $ | ||||||
| Earnings per share of common stock: | ||||||||
| Basic earnings per share | $ | |||||||
| Diluted earnings per share | $ | |||||||
| Weighted average basic & diluted shares outstanding: | ||||||||
| * | Retrospectively applied for effect of the forward stock split on April 5, 2024 |
See accompanying notes to condensed consolidated financial statements.
2
QDM INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
DEFICIT
FOR THE THREE MONTHS ENDED JUNE 30, 2024 AND 2023
| Preferred Stock | Common Stock | Treasury Stock | Preferred Stock Amount | Common Stock Amount | Treasury Amount | Additional Paid-in Capital | Subscription Receivable | Accumulated Deficit | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||||||
| March 31, 2023 | ( | ) | $ | | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | | $ | |||||||||||||||||||||||||||
| Net loss | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| June 30, 2023 (Unaudited) | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||
| March 31, 2024 | ( | ) | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| June 30, 2024 (Unaudited) | ( | ) | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| * | Retrospectively applied for effect of the forward stock split on April 5, 2024 |
See accompanying notes to condensed consolidated financial statements.
3
QDM INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2024 AND 2023
| June 30, 2024 | June 30, 2023 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Non-cash lease expenses | ||||||||
| Changes in working capital: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Long-term prepaid expenses | ( | ) | ||||||
| Accounts payable & accrued liabilities | ||||||||
| Income tax payable | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Due to a related party | ( | ) | ||||||
| Net cash provided by 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 | ||||||||
| Payment for offering cost | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | ||||||||
| NET INCREASE IN CASH | ||||||||
| CASH, BEGINNING OF PERIOD | $ | $ | ||||||
| CASH, END OF PERIOD | ||||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Non-cash transaction | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
4
QDM International Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2024 and 2023
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, which changed its name to Hong Kong YeeTah Insurance Broker Limited (“YeeTah”) in December 2022, 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 is also licensed to provide its customers with assistance on account opening and related services under 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 shareholder,
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
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 Share Exchange 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.
5
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 the wholly-owned subsidiary of QDM HK, 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.
On November 3, 2021,
the Company acquired
In 2022, 24/7 Kid was administratively dissolved with the State of Florida.
In March 2023, the Company consummated a public offering of its common
stock, par value $
On March 28, 2024, the Company filed an Articles
of Amendment to Articles of Incorporation of the Company (the “Amendment”) with the Florida Department of State to (i) increase
its authorized shares of common stock, par value $
As a result of the 2024 Forward Stock Split, each
issued and outstanding share of the Company’s common stock prior to the effective time of the 2024 Forward Stock Spilt were split
into
On April 4, 2024, the 2024 Forward Stock Split was approved and announced by the Financial Industry Regulatory Authority with an effective date on April 5, 2024.
2. Summary of significant accounting policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of June 30, 2024, and for the three months ended June 30, 2024 and 2023. The results of operations for the three months ended June 30, 2024 are not necessarily indicative of the operating results for the full year ending March 31, 2025 or any other period. These unaudited condensed consolidated financial statements have been derived from the accounting records of the Company and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended March 31, 2024, filed with the Securities and Exchange Commission (“SEC”) on July 1, 2024.
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
| October 4, 2023 | June 30, 2023 | |||
| Year-end spot rate | EUR 1 = US$ | EUR 1 = US$ | ||
| Average rate for the 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 June 30, 2024, 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.
7
Accounts Receivable
Accounts receivable represents trade receivable and are recognized initially at fair value and subsequently adjusted for any allowance for expected credit loss.
The Company evaluates the expected credit loss of accounts receivable based on historical collection experience, the financial condition of its customers and assumptions for the future movement of different economic drivers and how these drivers will affect each other. The Company writes off potentially uncollectible accounts receivable against the allowance for credit losses if it is determined that the amounts will not be collected or if a settlement with respect to a disputed receivable is reached for an amount that is less than the carrying value.
The Company historically did not have material bad debts in accounts receivable and management believed that there were no expected credit loss for doubtful accounts. There were no provision for credit loss for doubtful accounts for the three months ended June 30, 2024 and 2023 and there was no allowance for credit loss as of June 30 and March 31, 2024.
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, accounts payable and accrued liabilities, lease liabilities and due to related party. For lease liabilities, fair value approximates their carrying value at the year end as the interest rates used to discount the host contracts approximate market rates. 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 June 30, 2024 and March 31, 2024.
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.
| Category | Depreciation rate | Estimated residual value | ||
| Office equipment | ||||
| Leasehold improvements |
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 impairment losses for the three months ended June 30, 2024 and 2023.
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
10
Related party transactions
In general, related parties exist when there is a relationship that
offers the potential for transactions at less than arm’s-length, favorable treatment, or the ability to influence the outcome of
events different from that which might result in the absence of that relationship. A related party may be any of the following: a) an
affiliate, which is a party that directly or indirectly controls, is controlled by, or is under common control with another party; b)
a principle owner, owner of record or known beneficial owner of more than
Earnings per share
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 other 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.
11
3. Equity
2024 Forward Stock Split
On April 5, 2024, the Company effected a forward
split of its issued and outstanding shares of common stock at a ratio of 10-for-1. As a result of the 2024 Forward Stock Split, each issued
and outstanding share of the Company’s common stock prior to the effective time of the Forward Stock Spilt are split into ten shares
of common stock and the total number of issued and outstanding shares of common stock increases from
YeeTah is a licensed insurance broker company
in Hong Kong and subject to certain Hong Kong insurance broker requirements regarding its share capital and net assets. As per the requirements,
a licensed insurance broker company must at all times maintain a paid-up share capital of not less than USD64,103 (HK$
There were no stock transactions, including preferred stock, common stock and treasury stock, during the three months ended June 30, 2024 and 2023.
4. Related Party Transaction
| Name of related parties | Relationship with the Company | |
| Siu Ping Lo | ||
| Huihe Zheng | ||
| Ouya Properties Group Ltd. (“OPG”) | ||
| Tim Shannon |
| (1) |
Related Party Transactions
| (i) | During
the three months ended June 30, 2024, Huihe Zheng advanced $ |
12
Due to Related Party Balance
| June 30, 2024 | March 31, 2024 | |||||||
| US$ | US$ | |||||||
| Huihe Zheng | ||||||||
| Total | ||||||||
The due to related party balance is unsecured, interest-free and due on demand.
5. Income Taxes
Hong Kong
Under the current Hong Kong Inland Revenue Ordinance,
the Company’s Hong Kong subsidiaries are subject to a
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 Cyprus, the Company’s
Cyprus subsidiary is subject to a standard income tax rate of
13
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 June 30, 2024, the Company did not have any significant unrecognized uncertain tax positions.
6. Commitments and Contingencies
Other than two office leases both with a lease
term of
Operating lease
The 2022 Office Lease has a remaining lease term
of the operating lease of
The 2023 Office Lease has a remaining lease term
of the operating lease of
During the three months
ended June 30, 2024 and 2023, the operating lease expense recognized was $
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 its business, financial position, cash flows or results of operations taken as a whole. As of June 30, 2024, the Company is not a party to any material legal or administrative proceedings.
7. Subsequent Events
In accordance with ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2024 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.
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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. Certain capitalized terms used but not defined in the below discussion and elsewhere in this report have the meanings ascribed to them in the footnotes to the accompanying financial statements included as part of this report.
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 shareholder 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 900,000 shares of 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 and assumed the business operations of QDM BVI and its subsidiaries. YeeTah is primarily engaged in marketing and sales of diversified insurance products, including property, life and social security insurance products, underwritten by insurance companies operating in Hong Kong to individual customers from Hong Kong SAR and Mainland China. In addition, as an MPF Intermediary, YeeTah is also licensed to provide its customers with assistance on account opening and related services under the MPF and the ORSO in Hong Kong, both of which are retirement protection schemes set up for employees.
Results of Operations
Three Months Ended June 30, 2024 and 2023
The following table presents an overview of our results of operations for the three months ended June 30, 2024 and 2023:
For the Three Months Ended
June 30,
| ||||||||
| 2024 | 2023 | |||||||
| Revenue | $ | 978,265 | $ | 3,273,287 | ||||
| Cost of sales | 192,632 | 2,046,081 | ||||||
| Gross profit | 785,633 | 1,227,206 | ||||||
| Operating expenses | ||||||||
| General & administrative expenses | $ | 248,779 | $ | 154,644 | ||||
| Total operating expenses | 248,779 | 154,644 | ||||||
| Income from operations | 536,854 | 1,072,562 | ||||||
| Total other income | (8,807 | ) | (30,300 | ) | ||||
| Current income tax expenses | 86,281 | 160,220 | ||||||
| Net income | $ | 459,380 | $ | 942,642 | ||||
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Revenue
Revenue decreased by approximately $2.3 million, or 70.1%, for the three months ended June 30, 2024 as compared to the same period of 2023. Following the lift by Hong Kong government of the COVID-19 travel restrictions and quarantine requirements in January 2023, we experienced a rebound in business as cross-border travel resumes with mainland China after three years of restrictions. As a result, our revenue for the three months ended June 30, 2023 was significantly higher than the other periods. Our revenue subsequently stabilized and maintained at a level of approximately $1 million to $0.9 million per quarter for the three months ended March 31, 2024, December 31, 2023, and September 30, 2023.
Cost of sales
Cost of sales decreased by approximately $1.9 million, or 90.6%, for the three months ended June 30, 2024 as compared to the same period of 2023. The decrease was in line with the significant decrease in revenue.
Gross profit
Gross profit margin increased by approximately 42.8% for the three months ended June 30, 2024 as compared to the same period of 2023, which was primarily due to lower referral fees paid. On May 22, 2024, the Hong Kong Insurance Authority issued a circular, which mandated, among other things, that referral fees for introducing clients should not be excessively high and should be consistent with the work the referrers provide. In compliance with this regulatory directive, and after discussion with our referrers, we lowered our referral fee rates, which resulted in the significant decrease in cost of sales.
General and administrative expenses
General and administrative expenses generally are fixed and consist primarily of employee salaries, office rent, insurance costs, general office operating expenses (e.g., utilities, repairs and maintenance) and professional fees.
General and administrative expenses increased by approximately $94,000, or 60.9%, for the three months ended June 30, 2024 as compared to the same period of 2023. The change is primarily due to the fact that there were more rent expenses in relation to the 2023 Office Lease entered in April 2023, more employees were hired, and increase in professional fee.
Other income
Other income decreased by approximately $21,000, or 70.9%, for the three months ended June 30, 2024 as compared to the same period of 2023. The income was mainly attributable to the receipt of referral fees by introducing a client to an insurance broker in Macau. The decrease in referral fee was due to a much lower referral commission rate for renewal premiums in 2024.
Current income tax expenses
Current income tax expenses decreased by approximately $74,000, or 46.1%, for the three months ended June 30, 2024 as compared to the same period of 2023. The change is primarily due to decrease in profits in the three months ended June 30, 2024.
Net income
As a result of the factors described above, net income for the three months ended June 30, 2024 decreased by approximately $483,000, or 51.3%, as compared to the same period of 2023, when we had net income of approximately $943,000.
Foreign Currency Translation
The Company’s reporting currency is the United States dollar (“US$”). The Company’s operations are principally conducted in Hong Kong where the Hong Kong dollar is the functional currency. The functional currency of Lutter Global Limited, a subsidiary of the Company and QDMI Software Group Limited, a former subsidiary of the Company, 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 months ended June 30, 2024and 2023, and the year ended March 31, 2024.
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The exchanges rates used for translation from Euro to US$ are as follows:
| October 4, 2023 | June 30, 2023 | |||
| Period-end spot rate | EUR 1 = US$1.0518 | EUR 1 = US$1.0920 | ||
| Average rate for the year | EUR 1 = US$1.0877 | EUR 1 = US$1.0888 |
Liquidity and Capital Resources
Our working capital requirements mainly comprise of commissions paid to technical representatives and referral fees, operating lease payments and employee salaries. We have financed our operations primarily through cash generated by operating activities, equity financings and advances from our principal shareholder. 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 shareholder.
YeeTah is a licensed insurance broker company in Hong Kong and subject to certain Hong Kong insurance broker requirements regarding its share capital and net assets. According to the requirements, a licensed insurance broker company must at all times maintain a paid-up share capital of not less than USD64,103 (HK$500,000) and net assets of not less than USD64,103 (HK$500,000), subject to the phase-in transitional arrangement applicable to specified insurance broker companies, including YeeTah, pursuant to which, YeeTah is required to maintain the amount of paid-up share capital and net assets of (i) not less than USD12,821 (HK$100,000) for the period from September 23, 2019 to December 31, 2021 and (ii) not less than USD38,462 (HK$300,000) for the period from January 1, 2022 to December 31, 2023. YeeTah was in compliance with the applicable minimum paid-up share capital and net assets requirements as of June 30, 2024.
There have been no cash and any asset transactions between us and our subsidiaries since the Share Exchange. As of June 30, 2024 and March 31, 2024, we had $5,445,212 and $5,158,223, respectively, in cash and cash equivalents, which primarily consisted of cash deposited in banks.
| Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |||||||
| Net cash provided by operating activities | $ | 195,433 | $ | 1,891,703 | ||||
| Net cash used in investing activities | — | (92,693 | ) | |||||
| Net cash provided by financing activities | 91,556 | 100,761 | ||||||
| Effect of Exchange rate changes on cash | — | 35 | ||||||
| Net increase in cash, cash equivalents | 286,989 | 1,899,806 | ||||||
| Cash and cash equivalents at beginning of period | 5,158,223 | 2,717,745 | ||||||
| Cash and cash equivalents at end of period | $ | 5,445,212 | $ | 4,617,551 | ||||
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 shareholder. Although historically we were successful in obtaining equity financings through the sales of our securities and obtaining loans from our principal shareholder, the availability of such financings when required is dependent on many factors beyond our control.
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Operating Activities:
Net cash generated from operating activities was approximately $195,000 for the three months ended June 30, 2024, compared to net cash generated from operating activities of approximately $1.9 million for the same period in 2023, representing a decrease of approximately $1.7 million in the net cash inflow in operating activities. The decrease in net cash inflow in operating activities was primarily due to the decrease of net income of approximately $483,000 in the three months ended June 30, 2024 as compared to the same period of 2023 and the following major working capital changes:
| (1) | Change in accounts receivable resulted in an approximately $484,000 cash outflow for the three months ended June 30, 2024 compared to an approximately $144,000 cash outflow for the same period of 2023, which led to an approximately $340,000 increase in net cash outflow in operating activities. | |
| (2) | Change in accounts payable and accrued liabilities resulted in an approximately $134,000 cash inflow for the three months ended June 30, 2024 compared to an approximately $986,000 cash inflow for the same period of 2023, which led to an approximately $852,000 decrease in net cash inflow from operating activities. | |
| (3) | Change in short-term and long-term prepaid expenses resulted in an approximately $10,000 cash outflow for the three months ended June 30, 2024 compared to an approximately $55,000 cash outflow for the same period of 2023, which led to an approximately $45,000 increase in net cash inflow from operating activities. | |
| (4) | Change in income tax payable resulted in an approximately $86,000 cash inflow for the three months ended June 30, 2024 compared to an approximately $160,000 cash inflow for the same period of 2023, which led to an approximately $74,000 decrease in net cash inflow from operating activities. |
Investing Activities:
Net cash used in investing activities was nil for the three months ended June 30, 2024 compared to net cash used in investing activities of approximately $93,000 for the same period of 2023. Net cash used in investing activities for the three months ended June 30, 2023 was solely attributable to acquisitions of fixed assets.
Financing Activities:
For the three months ended March 31, 2024, net cash provided by financing activities was approximately $92,000, which was derived from the proceeds borrowed from related parties of approximately $129,000, partially offset by payment for offering cost of approximately $38,000.
For the three months ended March 31, 2023, net cash provided by financing activities was approximately $101,000, which was derived from the proceeds borrowed from related parties of approximately $101,000.
Material Commitments
We have no material commitments for the next twelve months.
We had two office lease agreements.
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Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of the financial statements, and revenues and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions, and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. Management bases their estimates on historical experience and on various other factors that they believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements.
While our significant accounting policies are more fully described in Note 2 – Summary of Significant Accounting Policies to our consolidated financial statements, we believe that there were no critical accounting policies and estimates that affect the preparation of financial statements.
Off-balance Sheet Commitments and Arrangements
As of June 30, 2024, 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.
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 June 30, 2024 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 have hired a qualified Chief Financial Officer who has extensive experience and expertise in US GAAP and SEC reporting requirements. We will continue to devote resources to remediate the aforementioned 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 June 30, 2024 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.
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 Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| QDM International Inc. | ||
| Date: August 16, 2024 | By: | /s/ Huihe Zheng |
| Name: | Huihe Zheng | |
| Title: | President and Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: August 16, 2024 | By: | /s/ Wei Li |
| Name: | Wei Li | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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