GD Culture Group Ltd

GD CULTURE GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Business and Organization

GD Culture Group Limited (“GDC” or the “Company”), formerly known as Code Chain New Continent Limited, is a Nevada corporation and a holding company. The Company currently conducts its operations on virtual content production (the “Virtual Content Production”) through the Company and two subsidiaries, AI Catalysis corp. (“AI Catalysis”) and Shanghai Xianzhui Technology Co., Ltd. (“SH Xianzhui”). The Company focuses its business mainly on: 1) AI-driven digital human creation and customization, and 2) Live streaming and e-commerce. The Company has relentlessly been focusing on serving its customers and creating value for them through the continual innovation and optimization of its products and services. Currently, the Company’s subsidiaries, Citi Profit Investment Holding Limited (“Citi Profit BVI”), Highlights Culture Holding Co., Limited (“Highlight HK”), Shanghai Highlight Entertainment Co., Ltd. (“Highlight WFOE”) are holding companies with no material operations.

SH Xianzhui was incorporated by Highlight WFOE and two other shareholders on August 10, 2023. SH Xianzhui is principally engaged in the provision of social media marketing agency service. Highlight WFOE initially owned 60% of the total equity interest of SH Xianzhui. On October 27, 2023, the Company entered into an equity purchase agreement with Highlight WFOE and Beijing Hehe Property Management Co., Ltd. (“Beijing Hehe”), which was amended on November 10, 2023 (such equity purchase agreement, as amended, the “Agreement” for purpose of this section “Investment in JV”), pursuant to which the Highlight WFOE agreed to purchase 13.3333% of the equity interest in SH Xianzhui from Beijing Hehe and the Company agreed to issue 400,000 shares of common stock of the Company, valued at $2.7820 per share, the average closing bid price of the common stock of GDC as of the five trading days immediately preceding the date of the Agreement, to Beijing Hehe or its assigns. On January 11, 2024, the Company issued the 400,000 shares of its common stock, at the price of $2.5 per share, to Beijing Hehe and the transaction was completed. Up to the date of these unaudited interim condensed consolidated financial statements were issued, the Company owns 73.3333% of the total equity interest of SH Xianzhui.

AI Catalysis is a Nevada corporation, incorporated on May 18, 2023. AI Catalysis is expected to bridge the realms of the internet, media, and artificial intelligence (“AI”) technologies. Positioned at the crossroads of traditional and streaming media, AI Catalysis plans to elevate the experience of media with AI-based interactive and smart content, aiming to transform the whole media landscape. At present, AI Catalysis primarily focused on the application of AI digital human technology with the sectors of e-commerce and entertainment to improve the interaction experiences online. AI Catalysis strives to deliver stable interactive livestreaming products to AI Catalysis’ users. AI Catalysis foresees future expansion to a variety of business sectors with AI applications in different scenarios. AI Catalysis plans to enter into the livestreaming market with a focus on e-commerce and livestreaming interactive game.

The accompanying unaudited interim condensed consolidated financial statements reflect the activities of GDC and each of the following entities:

As of the date of this report, the Company’s primary operations are focused on the live streaming market with focus on e-commerce in the United States. The Company is also working on the development of a mobile and web platform for interactive fiction—story experiences where readers make choices that branch the plot and lead to multiple endings.

Liquidity and Capital Resources

As of June 30, 2025, the Company had $1,117,760 in its operating bank accounts and working capital of approximately $1.5 million. From September 2024 to January 2025, Mr. Xiaojian Wang, the Chief Executive Officer of the Company (“CEO”), lent $399,485 to the Company through six loan agreements, for working capital purposes. Pursuant to the loan agreements, these loans are non-interest bearing and will be due from September 2025 to January 2026, respectively. From March 2025 to May 2025, the Company repaid $399,485 in full to the CEO. Up to the date of the unaudited interim condensed consolidated financial statements were issued, there was no outstanding loan from the CEO.

On January 23, 2025, Green Oasis Limited, a shareholder holding less than 5% ownership shares in the Company, provided a $100,000 loan to the Company, for working capital purposes, with maturity as of April 23, 2025. On April 25, 2025, Green Oasis Limited and the Company extended the maturity date to July 23, 2025, which was further extended to July 23, 2026 through an amendment agreement signed on July 30, 2025.

On March 4, 2025, the Company sold 1,115,600 shares of common stock at $0.896379 per share, generating gross proceeds of $1,000,000. The Company received net proceeds of $910,000 after deducting underwriter’s fees of $70,000 and a $20,000 reimbursement for the underwriter’s legal counsel and due diligence analysis expenses. The Company intended to use the proceeds from the offering for working capital purposes.

On May 2, 2025, the Company completed a securities offering in which it agreed to sell (i)1,115,600 shares of its common stock at a purchase price of approximately $0.524 per share and (ii)9,380,582 pre-funded warrants at a purchase price of approximately $0.523 per warrant. As of June 30, 2025, the Company received gross proceeds of $4,478,000 from the subscription of 1,115,600 shares of its common stock and 7,468,536 pre-funded warrants, with $17,390 still outstanding and receivable from the investor. The offering remains ongoing and has not yet been fully completed. Transaction costs incurred through June 30, 2025 included underwriter’s fees of $314,343 and a $20,000 reimbursement for the underwriter’s legal counsel and due diligence expenses. After deducting these expenses, net proceeds from the offering (excluding the receivable of $17,390 from the investor) amounted to $4,143,657 as of June 30, 2025. The Company intended to use the proceeds from the offering for working capital purposes.

The Company expects to continue incurring significant operating cash outflows to support its operations. Additional financing may be required to sustain the business. Management will make its best efforts to secure the necessary funding to support the Company’s operations. In the event of insufficient funds, the CEO has committed to providing financial support to the Company.

The Company evaluated its ability to continue as a going concern in accordance with ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern, which requires management to assess whether there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The management assessed its liquidity position and concluded that the Company will have sufficient liquidity to meet its obligations as they become due for at least the next twelve months from the date the unaudited interim condensed consolidated financial statements are issued.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are of a normal recurring nature and are necessary to fairly present the financial statements for the interim periods. The unaudited interim condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Results for the interim periods are not necessarily indicative of results to be expected for the full year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2024, which was filed with the SEC on March 18, 2025.

Principles of Consolidation

The unaudited interim condensed consolidated financial statements of the Company include the accounts of GDC and its wholly owned subsidiaries. All intercompany transactions and balances are eliminated upon consolidation.

Use of Estimates and Assumptions

The preparation of unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited interim condensed consolidated financial statements include the useful lives of intangible assets and equipment, impairment of long-lived assets, collectability of receivables, discount rate used to measure present value of lease liabilities and valuation allowance for deferred tax assets. Actual results could differ from these estimates.

Foreign Currency Translation and Transactions

The reporting currency of the Company is the U.S. dollar. The PRC subsidiaries of the Company conduct their businesses in the local currency, Renminbi (RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted set forth in the H.10 statistical release of the Federal Reserve Board at the end of the period. The statements of operations accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Translation adjustments included in accumulated other comprehensive income amounted to $213,595 and $213,571 as of June 30, 2025 and December 31, 2024, respectively. The consolidated balance sheets amount, with the exception of shareholders’ equity at June 30, 2025 and December 31, 2024 were translated at 7.1636 RMB and 7.2993 RMB to $1.00, respectively. The shareholders’ equity accounts were stated at their historical rate. The average translation rates applied to unaudited interim condensed consolidated statements of operations accounts for the six months ended June 30, 2025 and 2024 were 7.2526 RMB and 7.2410 RMB to $1.00, respectively. The unaudited interim condensed consolidated statements of cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the unaudited interim condensed consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.

Cash and Cash Equivalents

As of June 30, 2025 and December 31, 2024, the Company did not have any cash equivalents. All cash were unrestricted as to withdrawal and use and were demand deposits placed with commercial banks.

Prepaid and Other Current Assets

Prepaid and other current assets are advances paid to outside vendors for services purchases. The Company has legally binding contracts with its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.

Equipment

Equipment was stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method after consideration of the estimated useful lives of the assets and estimated residual value. The estimated useful lives and residual value are as follows:

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the unaudited interim condensed consolidated statements of operations and comprehensive loss. Expenditure for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives.

Intangible Assets

Intangible assets represent software copyright that are stated at cost, less accumulated amortization. Research and development costs associated with internally developed patents are expensed when incurred. Amortization expense is recognized on the straight-line basis over the estimated useful lives of the assets. The software copyrights have finite useful lives and are amortized using a straight-line method that reflects the estimated pattern in which the economic benefits of the intangible asset are to be consumed. The Company amortizes the cost of software copyrights, over their useful life using the straight-line method. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances revised estimates of useful lives. The estimated useful life is as follows:

Lease

The Company determines if an arrangement is a lease at inception. Leases that transfer substantially all of the benefits and risks incidental to the ownership of assets are accounted for as finance leases as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases. The Company has no significant finance leases.

The Company recognizes lease liabilities and corresponding right-of-use assets on the balance sheet for leases. Operating lease right- of-use assets (the “ROU”) are disclosed as non-current assets in the Company’s consolidated balance sheets. Current maturities of operating lease liabilities are classified as operating lease liabilities - current, and operating lease liabilities that will be due in more than one year are disclosed as non-current liabilities on the consolidated balance sheets. Operating lease right-of-use assets and operating lease liabilities are initially recognized based on the present value of future lease payments at lease commencement. The operating lease right-of-use asset also includes any lease payments made prior to lease commencement and the initial direct costs incurred by the lessee and is recorded net of any lease incentives received. As the interest rates implicit in most of the leases are not readily determinable, the Company uses the incremental borrowing rates based on the information available at lease commencement to determine the present value of the future lease payments. Operating lease expenses are recognized on a straight-line basis over the term of the lease.

Most leases have initial terms ranging from 1.1 to 5.4 years. The Company’s lease agreements did not include non-lease components. Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain any significant residual value guarantees or restricted covenants.

The Company evaluates the carrying value of ROU assets if there are indicators of impairment and reviews the recoverability of the related asset group.

The Company reassesses of a contract is or contains a leasing arrangement and re-measures ROU assets and liabilities upon modification of the contract. The Company will derecognize ROU assets and liabilities, with difference recognized in the income statement on the contract termination.

Impairment for Long-lived Assets

The Company’s determination of whether or not an indication of impairment exists at the cash generating unit level requires significant management judgment pertaining to intangible assets, including a software copyright of AI Box, which is used for online living-stream and a software copyright of Chat Box, which is used for online interactive entertainment scenarios, as well as the operating Right-of-use (“ROU”) assets, including the offices of the Company. Management considers both external and internal sources of information in assessing whether there are any indications that the Company’s intangible assets and ROU assets are impaired. Based on the evaluation, the Company did not recognize impairment losses in long-lived assets for the six months ended June 30, 2025 and 2024.

Fair Value Measurement

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, other receivables, other payables and accrued liabilities to approximate their fair values because of their short-term nature.

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

As of June 30, 2025 and December 31, 2024, the carrying values of cash, other receivables and other payables approximate their fair values due to the short-term nature of the instruments.

Selling and Marketing Expenses

Selling and marketing expenses mainly consist of marketing related expenses.

General and Administrative Expenses

General and administrative expenses mainly consist of (i) staff cost, rental and depreciation related to general and administrative personnel, (ii) professional expenses.

Research and Development Expenses

Research and development expenses mainly consist of outsourced research and development expenses. Research and development expenses are expensed as incurred.

Income Taxes

The Company accounts for income taxes in accordance with U.S. GAAP. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred taxes are accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the unaudited interim condensed consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. For the three months ended June 30, 2025, the Company recorded $7,428 penalty and interest for failed filing the tax return timely, consisting of $3,341 interest and $4,087 penalty. For the six months ended June 30, 2025, the Company recorded $64,731 penalty and interest for failed filing the tax return timely, consisting of $19,323 interest and $45,408 penalty. For the three and six months ended June 30, 2024, the Company did not record any penalty and interest for failed filing the tax return timely.

Interest

Interest income is mainly generated from bank deposits and other interest earning financial assets and is recognized on an accrual basis using the effective interest method.

Net Loss per Common Stock

Basic loss per share is computed by dividing loss available to common shareholders of the Company by the weighted average common stocks outstanding during the period. Diluted loss per share takes into account the potential dilution that could occur if securities or other contracts to issue common stocks were exercised and converted into common stocks.

In May 2023, November 2023 and May 2025, the Company issued and sold pre-funded warrants that are exercisable for shares of common stock at a nominal exercise price. In accordance with ASC 260, these prefunded warrants are considered to be common stock equivalents and are included in the calculation of basic and diluted earnings per share when the inclusion is dilutive. As the exercise price of the prefunded warrants is nominal and substantially all conditions necessary to exercise the warrants have been met, the prefunded warrants are included in the weighted average shares outstanding for both basic and diluted loss per share. As of June 30, 2025,7,468,536 pre-funded warrants as described were outstanding.

For the six months ended June 30, 2025 and 2024,1,260,665 and 7,309,181 of outstanding warrants (excluding the Pre-funded Warrants and Exchange Warrants) which are equivalent to convertible of 1,059,277 and 3,080,017 common stocks, respectively, were excluded from the diluted loss per share calculation due to their antidilutive effect.

Comprehensive Loss

Comprehensive loss is defined as the changes in equity of the Company during a year from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Accumulated other comprehensive income of the Company includes the foreign currency translation adjustments and unrealized gains or loss on available-for-sale investments.

Reclassification

Certain prior period amounts have been reclassified to conform to the current period presentation.

Recently Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280):Improvements to Reportable Segment Disclosures”, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The purpose of the amendment is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. The Company adopted ASU 2023-07 for the year ended December 31, 2024. The adoption has no significant impact on the Company’s financial statements and disclosure.

In December 2023, the FASB issued ASU 2023-09,Income Taxes (Topic 740):Improvements to Income Tax Disclosures (ASU 2023-09), which requires disclosure of incremental income tax information within the rate reconciliation and expanded disclosures of income taxes paid, among other disclosure requirements. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company’s management does not believe the adoption of ASU 2023-09 will have a material impact on its financial statements and disclosures.

In November 2024, the FASB issued ASU No. 2024-03,Disaggregation of Income Statement Expenses. This new guidance is designed to improve the disclosures about the types of expenses, including employee compensation, depreciation, and amortization, and costs incurred related to inventory and manufacturing activities. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027 on a prospective basis with optional retrospective application. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited interim condensed consolidated balance sheets, unaudited interim condensed consolidated statements of operations and comprehensive loss and unaudited interim condensed consolidated statements of cash flows.

Note 3 – Prepaid and Other Current Assets

Prepaid and other current assets consisted of the following as of June 30, 2025 and December 31, 2024:

Note 4 – Equipment, net

Equipment, net consisted of the following as of June 30, 2025 and December 31, 2024:

Depreciation expense for the three months ended June 30, 2025 and 2024 amounted to $1,075 and $1,182, respectively. Depreciation expense for the six months ended June 30, 2025 and 2024 amounted to $2,152 and $2,365, respectively.

Note 5 – Intangible Assets, net

Intangible assets consisted of the following as of June 30, 2025 and December 31, 2024:

Amortization expenses for the three months ended June 30, 2025 and 2024 were $361,827 and $203,134, respectively. Amortization expenses for the six months ended June 30, 2025 and 2024 were $424,227 and $385,468, respectively.

As of June 30, 2025, the net book value of software copyrights was $6,666,696, after deducting accumulated amortization of $1,460,745. No impairment losses were recorded for the three and six months ended June 30, 2025 and 2024.

Future amortization of intangible assets are as follows:

Note 6 – Other Payables and Accrued Liabilities

Other payables and accrued liabilities consisted of the following as of June 30, 2025 and December 31, 2024:

Note 7 – Related Party Balances and Transactions

Other payables – related parties:

As of June 30, 2025 and December 31, 2024, the balance of other payables - related parties were $204,339 and $502,266, respectively, mainly consisted of accrued compensation of the Company’s officers, interest- free loans received from the Company’s officers and operating related fees paid by the Company’s officer on behalf of the Company. As of June 30, 2025, the interest-free loans received from the Company’s officers were fully repaid.

For the three months ended June 30, 2025 and 2024, the Company recorded compensation expenses to its officers amounted to $32,036 and $20,000, respectively, for their services provided to the Company.

For the six months ended June 30, 2025 and 2024, the Company recorded compensation expenses to its officers amounted to $52,036 and $40,000, respectively, for their services provided to the Company.

Note 8– Leases

Leases are classified as operating leases or finance leases in accordance with ASC 842Leases. The Company’s operating leases mainly related to the rights to use building and office facilities. For leases with terms greater than 12 months, the Company records the related asset and liability at the present value of lease payments over the term. Certain leases include rental escalation clauses, renewal options and/or termination options, which are factored into the Company’s determination of lease payments when appropriate.

The balances for the operating leases where the Company is the lessee are presented as follows within the consolidated balance sheets:

Future lease payments under operating leases as of June 30, 2025 were as follows:

Lease expense for all the Company’s operating leases for the three months ended June 30, 2025 and 2024 were $118,524 and $146,674, respectively. Lease payments for all the Company’s operating leases for the three months ended June 30, 2025 and 2024 were $155,461 and $112,418, respectively.

Lease expense for all the Company’s operating leases for the six months ended June 30, 2025 and 2024 were $242,016 and $248,155, respectively. Lease payments for all the Company’s operating leases for the six months ended June 30, 2025 and 2024 were $320,117 and $233,095, respectively.

For the three and six months ended June 30, 2025, the Company incurred $84,218 short-term lease expenses. For the three and six months ended June 30, 2025, the short-term lease payments were $163,740. The Company did not incur any short-term lease expenses for the three and six months ended June 30, 2024.

Note 9 – Taxes

Income Tax

United States

GDC and AIC are corporations organized in the state of Nevada and operate primarily in the state of New York. As a result, they are subject to U.S. federal corporate income tax as well as state and local income taxes in New York.

For the six months ended June 30, 2025 and 2024, the applicable statutory tax rates were as follows:

The Company’s effective tax rate may differ from the statutory rates due to various factors, including non-deductible expenses, tax credits, valuation allowances, and the impact of state and local taxes. Additionally, the Company evaluates uncertain tax positions in accordance with ASC 740, recognizing tax benefits only if it is more likely than not that the position will be sustained upon examination.

British Virgin Islands

Citi Profit BVI is incorporated in the British Virgin Islands and are not subject to tax on income or capital gains under current British Virgin Islands law. In addition, upon payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.

Hong Kong

Highlight HK is incorporated in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. Highlight HK is subject to Hong Kong profit tax at a rate of 8.25% for assessable profits on the first HK$2 million and 16.5% for any assessable profits in excess of HK$2 million for the three and six months ended June 30, 2025 and 2024. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception.

PRC

Highlight WFOE and SH Xianzhui are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), qualified small and micro enterprises with annual taxable income not exceeding RMB 3 million are eligible for a preferential corporate income tax rate of 5% until December 31, 2027. This preferential rate is applied in accordance with relevant Chinese tax laws and regulations, and may be adjusted by the authorities from time to time.

The current and deferred components of income tax expenses from continuing operations appearing in the unaudited interim condensed consolidated statements of operations are as follows:

The Company is subject to U.S. federal income tax as well as state income tax in certain jurisdictions. The tax years 2022 to 2024 remain open to examination by the major taxing jurisdictions to which the Company is subject. The following is a reconciliation of income tax expenses at the effective rate to income tax at the calculated statutory rates:

As of June 30, 2025 and December 31, 2024, income tax payable to US tax authorities was $282,642 and $141,810, respectively. As of June 30, 2025 and December 31, 2024, no income tax was payable to Chinese tax authorities.

The principal components of the Company’s deferred income tax assets and liabilities as of June 30, 2025 and December 31, 2024 were as follows:

As of June 30, 2025, the Group had tax losses carry forwards of approximately $5.3 million from the entity in the PRC. The tax loss in the PRC can be carried forward for five years to offset future taxable profit and which will expire between 2028 and 2029 if not utilized. As of June 30, 2025, the Group had tax losses carry forwards of approximately $18.9 million from the entities in the U.S. The tax loss in the U.S. can be carried forward indefinitely.

Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management reviews this valuation allowance periodically and makes changes accordingly.

Note 10 – Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits.

Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At June 30, 2025 and December 31, 2024, the Company had approximately $0.9 million andnil cash excess of the FDIC insured limit. As of June 30, 2025 and December 31, 2024, $3,267 and $3,267 were deposited with a financial institution located in the PRC, respectively. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.

Note 11 – Equity

Statutory Reserves and Restricted Net Assets

In accordance with the PRC Regulations on Enterprises with Foreign Investment, an enterprise established in the PRC with foreign investment is required to make appropriations to certain statutory reserves, namely a general reserve fund, an enterprise expansion fund, a staff welfare fund and a bonus fund, all of which are appropriated from net profit as reported in its PRC statutory accounts. A foreign invested enterprise is required to allocate at least 10% of its annual after-tax profits to a general reserve fund until such fund has reached 50% of its respective registered capital. Appropriations to the enterprise expansion fund and staff welfare and bonus funds are at the discretion of the board of directors for the foreign invested enterprises. For other subsidiaries incorporated in the PRC, the general reserve fund was appropriated based on 10% of net profits as reported in each subsidiary’s PRC statutory accounts. General reserve and statutory surplus funds are restricted to set-off against losses, expansion of production and operation and increasing registered capital of the respective company. Staff welfare and bonus fund and statutory public welfare funds are restricted to capital expenditures for the collective welfare of employees. The reserves are not allowed to be transferred to the Company in terms of cash dividends, loans or advances, nor are they allowed for distribution except under liquidation. As of June 30, 2025 and December 31, 2024, there are no balance of the PRC statutory reserve funds.

In addition, under PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer their net assets to the Company in the form of dividend payments, loans or advances. Amounts of restricted net assets include paid up capital and statutory reserve funds of the Company’s PRC subsidiaries. As of June 30, 2025 and December 31, 2024, the Company did not have any restricted net assets.

Furthermore, cash transfers from the Company’s PRC subsidiaries to the Company’s subsidiaries outside of the PRC are subject to the PRC government control of currency conversion. Shortages in the availability of foreign currency may restrict the ability of the Company’s PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency denominated obligations.

Common Stock

On January 11, 2024, the Company issued the 400,000 shares of its common stock to Beijing Hehe for exchange of 13.3333% of the total equity interest of SH Xianzhui (as described in Note 1).

In March 2024, the Company entered into a placement agency agreement (the “March 2024 Placement Agency Agreement”), with Univest Securities, LLC (“Univest”), pursuant to which, Univest agrees to use its reasonable best efforts to sell the Company’s common stock in a registered direct offering and a concurrent private placement (the “March 2024 Offering”). Univest has no obligation to buy any of the securities from the Company or to arrange for the purchase or sale of any specific number or dollar amount of securities.

Pursuant to the March 2024 Offering, an aggregate of 810,277 shares of common stock of the Company, par value $0.0001 per share, were sold to certain purchasers (the “March 2024 Offering Purchasers”), pursuant to a securities purchase agreement, dated March 22, 2024 (the “March 2024 Securities Purchase Agreement”) at a price of $1.144 per common stock, for aggregated proceeds of approximately $0.9 million. The Company paid Univest a cash fee equal to 4.0% of the aggregate gross proceeds raised in the March 2024 Offering. The Company also issued warrants to Univest to purchase up to 40,514 shares of common stock of the Company at an exercise price of $1.373 per share, (the “March 2024 Placement Agent Warrants”). The March 2024 Placement Agent Warrants and the common stock underlying the March 2024 Placement Agent Warrants were not registered under the Securities Act, pursuant to the registration statement of March 2024 Offering. The March 2024 Placement Agent Warrants were issued pursuant to an exemption from the registration requirements of the Securities Act provided in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.

On May 31, 2024, the Company entered into a software purchase agreement with Shanxi Gangdong Cultural Media Co., Ltd., a seller unaffiliated with the Company (the “SGCM”). Pursuant to the agreement, the Company agreed to purchase and SGCM agreed to sell all of SGCM’s right, title, and interest in and to the certain software. The purchase price of the software shall be $1,248,000, payable in the form of issuance of 1,560,000 shares of common stock of the Company, valued at $0.80 per share. The Company plans to use the software to develop its AI business. On June 4, 2024, the Company issued 1,560,000 shares of common stock of the Company to the SGCM’s designees and the transaction was completed.

From February 2024 to October 2024,1,489,385 shares of the Company’s common stock were issued due to the exercise of pre-funded warrants, that were sold in the fiscal year 2023.

From March 2024 to October 2024,1,361,460 shares of the Company’s common stock were issued due to the exercise of 1,695,885 registered warrants issued in November 2023 (the “November 2023 Registered Warrants”).

In August 2024,92,756 shares of the Company’s common stock were issued due to the exercise of 54,646 registered warrants and 84,244 unregistered warrants that were issued in the fiscal year 2021.

On February 10, 2025, the Company entered into an At-The-Market Issuance Sales Agreement (the “ATM Agreement”) with Univest as the sales agent (the “February 2025 Offering”). Pursuant to the ATM Agreement, the Company may issue and sell from time to time, shares of its common stock having an aggregate offering price of not more than $10,000,000 through the sales agent or any of its sub-agent(s) or other designees, acting as sales agent. Up to the date the unaudited interim condensed consolidated financial statements were issued, the Company has not issue or sell any shares under the ATM Agreement.

On March 4, 2025, the Company entered into a securities purchase agreement (the “March 2025 Securities Purchase Agreement”) with certain investors for the sale of 1,115,600 shares of common stock at $0.896379 per share (the “March 2025 Offering”), generating net proceeds in the amount of $910,000, after deducting underwriter’s fees of $70,000, equal to seven percent (7%) of the aggregate gross proceeds raised in this Offering and reimbursement of $20,000 for the underwriter’s legal counsel and due diligence analysis expense. The Company plans to use the proceeds from the offering for working capital purposes.

On May 2, 2025, the Company entered into a securities purchase agreement (the “May 2025 Securities Purchase Agreement”) with certain investors for the sale of 1,115,600 shares of common stock at approximately $0.524 per share and 9,380,582 pre-funded warrants (the “May 2025 Pre-Funded Warrants”) at approximately $0.523 per warrant (the “May 2025 Offering”). As of June 30, 2025, the Company received gross proceeds of $4,478,000 for subscription of 1,115,600 shares of its common stock and 7,468,536 pre-funded warrants, with $17,390 still outstanding and receivable from the investor. The offering remains ongoing and has not yet been fully completed. Transaction costs incurred through June 30, 2025 included underwriter’s fees of $314,343 and a $20,000 reimbursement for the underwriter’s legal counsel and due diligence expenses. After deducting these expenses, net proceeds from the offering (excluding the receivable of $17,390 from the investor) amounted to $4,143,657 as of June 30, 2025. The Company intends to use the proceeds from the offering for working capital purposes.

On April 28, 2025, the Company entered into a software purchase agreement (the “Agreement”) with Gongzheng Xu and Qing Wang, who are unaffiliated with the Company (the “GXQW”). Pursuant to the Agreement, the Company agreed to purchase and the GXQW agreed to sell all of GXQW’s right, title, and interest in and to the certain software (the “Chat Box”). The purchase price of the software shall be payable in the form of issuance of 2,444,295 shares of the Company’s common stock (the “Shares”). On April 28, 2025, the Company issued 2,444,295 shares of its common stock to GXQW and the transaction was completed. The Company plans to use the software to develop its AI business.

As of June 30, 2025 and December 31, 2024, the total outstanding shares of the Company’s common stock were 16,795,433 and 11,167,294, respectively.

Warrants

Placement Agent Warrants

In March 2024, the Company entered into a placement agency agreement (the “March 2024 Placement Agency Agreement”), with Univest, pursuant to which, Univest agrees to use its reasonable best efforts to sell the Company’s common stock in a registered direct offering and a concurrent private placement (the “March 2024 Offering”). Univest has no obligation to buy any of the securities from the Company or to arrange for the purchase or sale of any specific number or dollar amount of securities.

In connection with the March 2024 Offering, the Company issued 40,514 shares of unregistered warrants (the “March 2024 Placement Agent Warrants”) to Univest, at an exercise price of $1.373 per share. The March 2024 Placement Agent Warrants and the common stock underlying the March 2024 Placement Agent Warrants were not registered under the Securities Act, pursuant to the registration statement of March 2024 Offering. The March 2024 Placement Agent Warrants were issued pursuant to an exemption from the registration requirements of the Securities Act provided in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.

As of June 30, 2025 and December 31, 2024,695,535 unregistered warrants issued to Univest were outstanding.

Prefunded Warrants

In connection with the May 2025 Offering, the Company issued 7,468,536 shares of pre-funded warrants (the “May 2025 Prefunded Warrants”), which is exercisable immediately.

From February 2024 to October 2024, holders of 1,489,763 pre-funded warrants, issued in November 2023, exercised their options to purchase 1,489,385 shares of the Company’s common stock.

As of June 30, 2025 and December 31, 2024,7,468,536 andnil prefunded warrants were outstanding, respectively.

Registered Warrants

On March 26, 2024, October 16, 2024 and October 17, 2024, holders of 1,695,885 registered warrants issued in November 2023 (the “November 2023 Registered Warrants”) exercised their options to purchase 1,361,460 shares of the Company’s common stock. On April 30, 2025, holders of 1,051,341 registered November 2023 Registered Warrants exercised their options to purchase 952,644 shares of the Company’s common stock, on a cashless basis.

As of June 30, 2025 and December 31, 2024,565,130 and 1,616,471 shares of November 2023 Registered Warrants were outstanding, respectively.

February 2021 Registered and Unregistered Warrants

In August 2024, holders of 54,646 registered warrants and 84,244 unregistered warrants issued in 2021 exercised their options to purchase 92,756 shares of the Company’s common stock, on a cashless basis. As of June 30, 2025 and December 31, 2024, no warrants issued in 2021 was outstanding.

The summary of warrant activities for the six months ended June 30, 2025 were as follows:

The summary of warrant activities for the six months ended June 30, 2024 were as follows:

Note 12 – Commitments and Contingencies

Contingencies

From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.

Note 13 – Segment Reporting

In November 2023, the FASB issued ASU 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which improved the reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses enabling investors to better understand an entity’s overall performance and assess potential future cash flows. ASU 2023-07 requires entities with a single reportable segment to provide all the disclosures required by the amendments in ASU 2023-07 and all existing segment disclosures in Segment Reporting (Topic 280). ASU 2023-07 is effective for annual periods on January 1, 2024, and interim periods beginning on January 1, 2025. The Group adopted this standard for its 2024 annual financial statements and applied this standard retrospectively for all prior periods presented in the financial statements. ASU 2023-07 has no material impact on the Group’s consolidated financial statements.

The Company operates and manages its business as a single segment and hasone operating and reportable segment, the Virtual Content Production. The Company’s Chief Executive Officer is the chief operating decision-maker (“CODM”). When making decisions about allocating resources and assessing the performance of the Company as a whole, the CODM review operating metrics and consolidated financial statements.

The Company concluded that consolidated net loss reported in the consolidated statements of operations and comprehensive loss is the measure of segment profitability, and consolidated total assets reported in the consolidated balance sheets is the measure of segment assets. The CODM refer to consolidated operating results and financial condition when addressing strategic and operational matters and allocating resources. Significant expense categories regularly provided to and reviewed by the CODM are those presented in the consolidated statements of operations and comprehensive loss. As substantially all of the Company’s long-lived assets are located in the Unite States, and substantially all of the Company’s expenses are derived from within the United States, no geographical segments are presented.

Note 14 – Subsequent events

The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to August 12, 2025, which is the date that the unaudited interim condensed consolidated financial statements were available to be issued. Based on this review, the Company did not identify any subsequent event that would have required adjustment or disclosure in the unaudited interim condensed consolidated financial statements.