Wetouch(WETH) - 2024 Q1 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section advises readers that the report contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations[8][11][12] - Key risks include significant reliance on top customers, potential uncollectible accounts receivable, and the impact of dismissing BF Borgers as auditor, which may cause expenses, delays, and affect stock price[10][203][205] - Operational and strategic risks involve maintaining product quality, effective competition, securing additional financing for business plans and new facilities, and potential disruptions from third-party suppliers and raw material cost fluctuations[10][142] - Regulatory and geopolitical risks include potential fines from the Chinese government for uncompleted filings, adverse regulatory developments in Mainland China, delisting under the Holding Foreign Companies Accountable Act, and uncertainties in the PRC legal system and exchange rate fluctuations[10][13][106][107][182][183][206][209] PART I - FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements for Wetouch Technology Inc. and its subsidiaries, along with management's discussion and analysis - The financial information includes unaudited condensed consolidated balance sheets, statements of income and comprehensive loss, statements of changes in stockholders' equity, and statements of cash flows[15] Item 1. Financial Statements This section provides unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flow statements, with detailed notes Condensed Consolidated Balance Sheets Total assets increased to $123.1 million as of March 31, 2024, while total liabilities significantly decreased to $2.6 million, driven by debt repayment Condensed Consolidated Balance Sheet Highlights | Metric | March 31, 2024 (USD) | December 31, 2023 (USD) | Change (USD) | | :-------------------------------- | :------------------- | :-------------------- | :----------- | | Total Assets | $123,147,198 | $119,641,398 | $3,505,800 | | Total Current Assets | $110,035,893 | $106,781,535 | $3,254,358 | | Cash | $94,796,450 | $98,040,554 | $(3,244,104) | | Accounts Receivable | $10,937,840 | $7,455,252 | $3,482,588 | | Prepaid Expenses and Other Current Assets | $4,116,860 | $1,063,627 | $3,053,233 | | Total Liabilities | $2,607,957 | $6,720,788 | $(4,112,831) | | Total Current Liabilities | $2,237,407 | $6,342,417 | $(4,105,010) | | Convertible Promissory Notes Payable | $- | $1,239,126 | $(1,239,126) | | Accrued Expenses and Other Current Liabilities | $626,611 | $3,992,905 | $(3,366,294) | | Total Stockholders' Equity | $120,539,241 | $112,920,610 | $7,618,631 | Condensed Consolidated Statements of Income and Comprehensive Loss Net income decreased significantly to $0.6 million in Q1 2024 from $2.8 million in Q1 2023, due to increased cost of revenues and interest expenses Condensed Consolidated Statements of Income and Comprehensive Loss Highlights | Metric | 3 Months Ended March 31, 2024 (USD) | 3 Months Ended March 31, 2023 (USD) | Change (USD) | Change (%) | | :------------------------------------ | :---------------------------------- | :---------------------------------- | :----------- | :--------- | | Revenues | $14,877,259 | $13,433,461 | $1,443,798 | 10.7% | | Cost of Revenues | $(11,539,301) | $(7,394,661) | $(4,144,640) | 56.1% | | Gross Profit | $3,337,958 | $6,038,800 | $(2,700,842) | (44.7)% | | Total Operating Expenses | $(1,033,054) | $(1,738,346) | $705,292 | (40.6)% | | Income From Operations | $2,304,904 | $4,300,454 | $(1,995,550) | (46.4)% | | Total Other Expenses | $(1,084,186) | $(101,806) | $(982,380) | 965.0% | | Interest Expense | $(1,169,974) | $(33,399) | $(1,136,575) | 3403.8% | | Income Before Income Tax Expense | $1,220,718 | $4,198,648 | $(2,977,930) | (70.9)% | | Net Income | $558,870 | $2,793,249 | $(2,234,379) | (80.0)% | | Basic EPS | $0.04 | $0.35 | $(0.31) | (88.6)% | | Diluted EPS | $0.04 | $0.35 | $(0.31) | (88.6)% | Condensed Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity increased to $120.5 million as of March 31, 2024, primarily from a public offering and net income, offset by currency adjustments Condensed Consolidated Statements of Changes in Stockholders' Equity Highlights | Metric | March 31, 2024 (USD) | December 31, 2023 (USD) | Change (USD) | | :------------------------------------ | :------------------- | :-------------------- | :----------- | | Total Stockholders' Equity | $120,539,241 | $112,920,610 | $7,618,631 | | Common Stock (Shares) | 11,931,534 | 9,732,948 | 2,198,586 | | Common Stock (Amount) | $11,932 | $9,733 | $2,199 | | Additional Paid-in Capital | $52,501,680 | $43,514,125 | $8,987,555 | | Retained Earnings | $70,035,962 | $69,477,092 | $558,870 | | Accumulated Other Comprehensive Loss | $(9,205,425) | $(7,275,432) | $(1,929,993) | Condensed Consolidated Statements of Cash Flows Net cash decreased by $3.2 million in Q1 2024, with $9.2 million used in operations, partially offset by $7.5 million from financing activities Condensed Consolidated Statements of Cash Flows Highlights | Cash Flow Activity | 3 Months Ended March 31, 2024 (USD) | 3 Months Ended March 31, 2023 (USD) | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Net cash (used in) provided by operating activities | $(9,217,544) | $2,716,539 | | Net cash used in investing activities | $(111,289) | $- | | Net cash provided by financing activities | $7,506,140 | $40,051,735 | | Effect of changes of foreign exchange rates on cash | $(1,421,411) | $(760,531) | | Net (decrease) increase in cash | $(3,244,104) | $42,007,743 | | Cash, beginning of period | $98,040,554 | $51,250,505 | | Cash, end of period | $94,796,450 | $93,258,248 | Notes to Condensed Consolidated Financial Statements This section details the company's business, accounting policies, and specific financial line items, including corporate structure changes and revenue segmentation NOTE 1 — BUSINESS DESCRIPTION Wetouch Technology Inc. specializes in touchscreen displays for various industries, with Sichuan Wetouch deconsolidated in March 2023 due to a government-directed relocation - Wetouch Technology Inc. acquired BVI Wetouch through a reverse merger in October 2020, making BVI Wetouch a wholly-owned subsidiary[26] - The company's primary business is the research, development, manufacture, and distribution of touchscreen displays for financial terminals, automotive, POS, gaming, medical, and HMI industries[27] - Sichuan Wetouch was deconsolidated on March 30, 2023, following a government-directed relocation and its operations being taken over by Sichuan Vtouch[32][33][37] NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial statements adhere to U.S. GAAP, with Sichuan Wetouch deconsolidated in March 2023, and property, plant and equipment depreciation revised - Financial statements are prepared under U.S. GAAP, relying on management estimates for various financial items[35][39] - Sichuan Wetouch was deconsolidated on March 30, 2023, due to loss of operational control, resulting in no gain or loss from the disposal[37][38] - Property, plant and equipment are stated at cost less accumulated depreciation, with construction in progress capitalized and expected to be completed by Q1 2025[41][42] NOTE 3 — ACCOUNTS RECEIVABLE Accounts receivable increased to $10.9 million as of March 31, 2024, from $7.5 million at December 31, 2023, primarily from product sales Accounts Receivable | Metric | March 31, 2024 (USD) | December 31, 2023 (USD) | | :------------------ | :------------------- | :-------------------- | | Accounts receivable | $10,937,840 | $7,455,252 | NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets significantly increased to $4.1 million as of March 31, 2024, driven by new consulting and market research fees Prepaid Expenses and Other Current Assets | Metric | March 31, 2024 (USD) | December 31, 2023 (USD) | | :-------------------------------- | :------------------- | :-------------------- | | Prepaid expenses and other current assets | $4,116,860 | $1,063,627 | | Prepaid consulting service fees | $2,138,482 | $- | | Prepaid market research fees | $955,000 | $- | | Prepayment for land use right | $543,638 | $537,998 | - The company advanced $955,000 in market research fees to two individuals for overseas market research, bearing 3.45% interest and due February 28, 2025[45] NOTE 5 — PROPERTY, PLANT AND EQUIPMENT, NET Net property, plant and equipment slightly decreased to $12.75 million as of March 31, 2024, with construction in progress forming the majority Property, Plant and Equipment, Net | Metric | March 31, 2024 (USD) | December 31, 2023 (USD) | | :-------------------------------- | :------------------- | :-------------------- | | Property, plant and equipment, net | $12,753,915 | $12,859,863 | | Construction in progress | $12,722,820 | $12,825,896 | | Accumulated depreciation | $(25,264) | $(23,348) | - Depreciation expense for the three months ended March 31, 2024, was $2,316[46] - The company has a construction commitment of RMB5.0 million (equivalent to $0.7 million) as of March 31, 2024[49] NOTE 6 — INCOME TAXES The effective income tax rate decreased to 25.4% in Q1 2024 from 33.5% in Q1 2023, reflecting varying tax rates across entities Effective Income Tax Rates | Period | Effective Income Tax Rate | | :-------------------------------- | :------------------------ | | Three Months Ended March 31, 2024 | 25.4% | | Three Months Ended March 31, 2023 | 33.5% | - Sichuan Vtouch is subject to a 25% income tax rate in the PRC[55] NOTE 7 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities significantly decreased to $0.63 million as of March 31, 2024, due to full payment of various accrued fees Accrued Expenses and Other Current Liabilities | Metric | March 31, 2024 (USD) | December 31, 2023 (USD) | | :------------------------------------ | :------------------- | :-------------------- | | Accrued expenses and other current liabilities | $626,611 | $3,992,905 | | Accrued private placement agent fees | $- | $1,200,000 | | Accrued consulting fees | $- | $1,370,972 | | Accrued litigation charges | $- | $45,828 | - The company made full payments for accrued private placement agent fees and accrued consulting fees in February 2024[59] NOTE 8 — CONVERTIBLE PROMISSORY NOTES PAYABLE The company fully repaid $2.59 million in convertible promissory notes in February 2024, leading to a significant increase in interest expenses due to default charges - The company fully repaid $2,586,960 for the remaining five outstanding convertible promissory notes on February 23, 2024, including $1,400,750 in principal and $1,186,210 in accrued interest and default charges[69] Interest Expenses from Convertible Promissory Notes | Period | Interest Expenses (USD) | | :-------------------------------- | :---------------------- | | Three Months Ended March 31, 2024 | $1,169,974 | | Three Months Ended March 31, 2023 | $33,399 | - One lender exercised Note Warrants cashlessly for 2,725 shares of common stock during the three months ended March 31, 2024[78] NOTE 9 — STOCKHOLDERS' EQUITY Total stockholders' equity increased to $120.5 million as of March 31, 2024, following a public offering that generated $10.8 million in gross proceeds - On February 23, 2024, the company closed a public offering of 2,160,000 shares at $5.00 per share, generating $10.8 million in gross proceeds[85][89] - Issuance costs of $1,810,246 were charged to additional paid-in capital during the three months ended March 31, 2024[90] - A 1-for-20 reverse stock split was approved on July 16, 2023, and became effective on September 12, 2023[88] NOTE 10 — SHARE BASED COMPENSATION No share-based compensation expense was recognized in Q1 2024 or Q1 2023, with warrants for 35,861 shares exercised during Q1 2024 - No share-based compensation expense was recognized for the three months ended March 31, 2024, or 2023[96] - Warrants for 35,861 shares of common stock related to legal and consulting services were exercised during the three months ended March 31, 2024, and no such warrants remain outstanding[96] NOTE 11 — RISKS AND UNCERTAINTIES The company faces credit, interest rate, and significant currency risks, alongside high revenue concentration with top ten customers accounting for 98.8% of Q1 2024 revenue - The company faces significant credit risk from accounts receivable and currency risk due to RMB-denominated transactions and assets[98][101] - Revenue concentration is high, with the top ten customers accounting for 98.8% of total revenue for the three months ended March 31, 2024[103] - Raw material purchases are concentrated, with three suppliers accounting for approximately 42.4% of total raw material purchases in Q1 2024[104] NOTE 12 — COMMITMENTS AND CONTINGENCIES The company faces potential CSRC fines for untimely Nasdaq listing filings and is involved in two ongoing legal cases, with a construction commitment of $0.7 million - The company failed to timely complete CSRC filing procedures for its Nasdaq listing, potentially facing fines of RMB 1 million to RMB 10 million[106][107][182][183] - All prior material legal proceedings against the company and its former chairman have been settled and discharged[109] - Two ongoing legal cases involve a claim for $425,540 for unsettled accounts payable and fund interests, and another for a $233,310 debt payable where Sichuan Vtouch was ordered joint liability[129][132] - As of March 31, 2024, the company has a construction commitment of RMB5.0 million (equivalent to $0.7 million)[134][185] NOTE 13 — REVENUES Total revenues increased by 11.2% to $14.88 million for the three months ended March 31, 2024, with overseas sales growing significantly by 34.1% Geographical Revenue Breakdown | Region | 3 Months Ended March 31, 2024 (USD) | 3 Months Ended March 31, 2023 (USD) | Change (USD) | Change (%) | | :-------------------- | :---------------------------------- | :---------------------------------- | :----------- | :--------- | | Sales in PRC | $9,374,473 | $9,287,566 | $86,907 | 0.9% | | Sales in Overseas | $5,502,786 | $4,145,895 | $1,356,891 | 32.7% | | Total Revenues | $14,877,259 | $13,433,461 | $1,443,798 | 10.7% | NOTE 14 — SUBSEQUENT EVENT The company's common stock began trading on Nasdaq on February 21, 2024, but it failed to timely complete CSRC filing procedures for its overseas listing - The company's common stock began trading on the Nasdaq Capital Market on February 21, 2024[136] - The company failed to timely complete CSRC filing procedures for its overseas listing, and management is monitoring potential penalties[136] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's Q1 2024 financial performance, covering revenues, gross profit, operating expenses, net income, liquidity, and capital resources - The company is engaged in the research, development, manufacturing, sales, and servicing of medium to large-sized projected capacitive touchscreens for various specialized industries[140] - The company is actively constructing new production facilities and office buildings in Chengdu, China, with building construction estimated to finish by the end of 2024 and production to commence in Q3 2025[142] Overview Wetouch Technology Inc. specializes in projected capacitive touchscreens and is expanding production with new facilities in Chengdu, expected to be completed by end of 2024 - Wetouch specializes in medium to large-sized projected capacitive touchscreens (7.0 to 42 inches) for various industries, including automotive, industrial HMI, and medical[140] - The company is constructing new production facilities and office buildings in Chengdu, China, with building construction expected to finish by the end of 2024 and production to commence in Q3 2025[142] Results of Operations Q1 2024 revenues increased by 11.2% to $14.9 million, but gross profit decreased by 45.0% and net income fell by 78.6% due to higher costs and interest Q1 2024 vs Q1 2023 Financial Highlights | Metric | Q1 2024 (USD Million) | Q1 2023 (USD Million) | Change (%) | | :---------------------- | :-------------------- | :-------------------- | :--------- | | Revenues | $14.9 | $13.4 | 11.2% | | Gross Profit | $3.3 | $6.0 | (45.0)% | | Gross Profit Margin | 22.4% | 45.0% | (22.6)% | | Net Income | $0.6 | $2.8 | (78.6)% | | Total Volume Shipped | 681,370 units | 635,276 units | 7.3% | Revenues Total revenues for Q1 2024 increased by 11.2% to $14.9 million, driven by higher sales volume and average selling price, with significant overseas growth Revenue Performance (Q1 2024 vs Q1 2023) | Metric | Q1 2024 | Q1 2023 | Change | Change (%) | | :-------------------------------- | :---------- | :---------- | :------- | :--------- | | Total Revenues (USD Million) | $14.9 | $13.4 | $1.5 | 11.2% | | Total Units Sold | 681,370 | 635,276 | 46,094 | 7.3% | | Revenue from PRC (USD Million) | $9.4 | $9.3 | $0.1 | 1.1% | | Revenue from Overseas (USD Million) | $5.5 | $4.1 | $1.4 | 34.1% | - The increase in revenue was driven by a 7.3% increase in sales volume and an 8.5% increase in average selling price, partially offset by a 5.1% negative impact from RMB depreciation[146] - The company is shifting its production mix towards higher-end products like automotive, medical, gaming, and industrial control computer touchscreens due to greater growth potential and stronger demand[153] Gross Profit and Gross Profit Margin Gross profit decreased by 45.0% to $3.3 million in Q1 2024, with margin falling to 22.4% due to a 56.7% increase in cost of revenues Gross Profit and Margin (Q1 2024 vs Q1 2023) | Metric | Q1 2024 | Q1 2023 | Change (USD) | Change (%) | | :---------------- | :-------- | :-------- | :----------- | :--------- | | Gross Profit | $3.3 million | $6.0 million | $(2.7) million | (45.0)% | | Gross Profit Margin | 22.4% | 45.0% | (22.6)% | - | - The decrease in gross profit margin was primarily due to a 56.7% increase in cost of revenues, driven by a 66.9% rise in raw material costs[154] - Raw material cost increases were attributed to U.S. export controls on advanced computing and semiconductor manufacturing to China, and production under capacity during the Chinese Spring Festival[154] Selling Expenses Selling expenses increased significantly by 806.8% to $459,792 in Q1 2024, primarily due to increased traveling and logistic expenses for marketing Selling Expenses (Q1 2024 vs Q1 2023) | Metric | Q1 2024 (USD) | Q1 2023 (USD) | Change (USD) | Change (%) | | :------------------------ | :------------ | :------------ | :----------- | :--------- | | Selling Expenses | $459,792 | $50,705 | $409,087 | 806.8% | | As a percentage of revenues | 3.4% | 0.0% | 3.4% | - | - The increase in selling expenses was primarily due to a $0.3 million increase in traveling expenses and a $0.1 million increase in logistic expenses for marketing[156] General and Administrative Expenses General and administrative expenses decreased by 70.6% to $0.5 million in Q1 2024, mainly due to the full payment of a $1.2 million accrued private placement agent fee General and Administrative Expenses (Q1 2024 vs Q1 2023) | Metric | Q1 2024 (USD Million) | Q1 2023 (USD Million) | Change (USD Million) | Change (%) | | :-------------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | General and Administrative Expenses | $0.5 | $1.7 | $(1.2) | (70.6)% | | As a percentage of revenues | 3.4% | 12.7% | (9.3)% | - | - The decrease was primarily due to the full payment of an accrued $1.2 million private placement agent fee in February 2024, which was accrued in Q1 2023[158] Research and Development Expenses Research and development expenses increased by 104.6% to $42,738 in Q1 2024, primarily due to an increase in material consumption Research and Development Expenses (Q1 2024 vs Q1 2023) | Metric | Q1 2024 (USD) | Q1 2023 (USD) | Change (USD) | Change (%) | | :------------------------------ | :------------ | :------------ | :----------- | :--------- | | Research and Development Expenses | $42,738 | $20,885 | $21,853 | 104.6% | - The increase was due to an increase in material consumption[159] Operating Income Operating income decreased by 46.5% to $2.3 million in Q1 2024, mainly due to lower gross margin and higher selling expenses Operating Income (Q1 2024 vs Q1 2023) | Metric | Q1 2024 (USD Million) | Q1 2023 (USD Million) | Change (USD Million) | Change (%) | | :--------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Operating Income | $2.3 | $4.3 | $(2.0) | (46.5)% | - The decrease was primarily due to lower gross margin and higher selling expenses, partially offset by lower general and administrative expenses[160] Gain (loss) on Changes in Fair Value of Common Stock Purchase Warrants The company recorded a gain of $7,821 on changes in fair value of common stock purchase warrants in Q1 2024, a significant improvement from a prior year loss Gain (Loss) on Changes in Fair Value of Common Stock Purchase Warrants (Q1 2024 vs Q1 2023) | Metric | Q1 2024 (USD) | Q1 2023 (USD) | Change (USD) | Change (%) | | :---------------------------------------------------- | :------------ | :------------ | :----------- | :--------- | | Gain (loss) on changes in fair value of common stock purchase warrants | $7,821 | $(97,602) | $105,423 | (108.0)% | Interest Expenses Interest expenses surged to $1.17 million in Q1 2024, primarily due to $1.15 million in default interest charges from convertible promissory note repayments Interest Expenses (Q1 2024 vs Q1 2023) | Metric | Q1 2024 (USD Million) | Q1 2023 (USD Million) | Change (USD Million) | Change (%) | | :---------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Interest Expenses | $1.2 | $0.0 | $1.2 | N/A | - The significant increase in interest expenses was mainly due to $1,145,995 in default interest charges upon the repayment of convertible promissory notes[163] Income Taxes Income tax expense decreased by 57.1% to $0.6 million in Q1 2024, reflecting a lower effective tax rate of 25.4% due to reduced income before taxes Income Taxes (Q1 2024 vs Q1 2023) | Metric | Q1 2024 (USD Million) | Q1 2023 (USD Million) | Change (USD Million) | Change (%) | | :----------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Income before Income Taxes | $1.2 | $4.2 | $(3.0) | (71.4)% | | Income Tax (Expense) | $(0.6) | $(1.4) | $0.8 | (57.1)% | | Effective income tax rate | 25.4% | 33.5% | (8.1)% | - | Net Income Net income for Q1 2024 significantly decreased to $0.6 million from $2.8 million in Q1 2023, driven by lower gross margin and increased expenses Net Income (Q1 2024 vs Q1 2023) | Metric | Q1 2024 (USD Million) | Q1 2023 (USD Million) | Change (USD Million) | Change (%) | | :--------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Net Income | $0.6 | $2.8 | $(2.2) | (78.6)% | Liquidity and Capital Resources As of March 31, 2024, the company had $94.8 million in cash and $110.0 million in current assets, with $9.2 million cash used in operating activities Liquidity and Capital Resources Highlights | Metric | March 31, 2024 (USD Million) | December 31, 2023 (USD Million) | | :-------------------------------- | :--------------------------- | :--------------------------- | | Cash and Cash Equivalents | $94.8 | $98.0 | | Total Current Assets | $110.0 | $106.8 | | Total Current Liabilities | $2.2 | $6.3 | - Net cash used in operating activities was $9.2 million in Q1 2024, a significant shift from $2.7 million provided in Q1 2023[171] - Financing activities provided $7.5 million in Q1 2024, mainly from the 2024 Public Offering, compared to $40.0 million in Q1 2023 from a private placement[174][175] - Days Sales Outstanding (DSO) decreased to 56 days for Q1 2024 from 77 days for the year ended December 31, 2023[176] Operating Activities Net cash used in operating activities was $9.2 million for Q1 2024, a significant shift from $2.7 million provided in Q1 2023, due to decreased net income and increased expenses Net Cash Flow from Operating Activities | Period | Net Cash (Used in) Provided by Operating Activities (USD) | | :-------------------------------- | :------------------------------------------ | | Three Months Ended March 31, 2024 | $(9,217,544) | | Three Months Ended March 31, 2023 | $2,716,539 | - The change was driven by a $2.2 million decrease in net income, a $0.1 million decrease in gain on fair value of warrants, increases in inventories and prepaid assets, and decreases in various liabilities[171] Investing Activities Net cash used in investing activities for Q1 2024 was $0.1 million, solely for property, plant, and equipment purchases, with no activity in the prior year Net Cash Flow from Investing Activities | Period | Net Cash Used in Investing Activities (USD) | | :-------------------------------- | :-------------------------------- |\ | Three Months Ended March 31, 2024 | $(111,289) | | Three Months Ended March 31, 2023 | $- | - The cash outflow was for the purchase of property, plant, and equipment[172] Financing Activities Net cash provided by financing activities was $7.5 million for Q1 2024, primarily from a public offering, contrasting with $40.0 million from a private placement in Q1 2023 Net Cash Flow from Financing Activities | Period | Net Cash Provided by Financing Activities (USD) | | :-------------------------------- | :-------------------------------- |\ | Three Months Ended March 31, 2024 | $7,506,140 | | Three Months Ended March 31, 2023 | $40,051,735 | - Q1 2024 financing cash flow included $9.0 million from the 2024 Public Offering, offset by $1.4 million in convertible promissory note repayments[174] - Q1 2023 financing cash flow included $40.0 million from a private placement[175] Holding Company Structure No changes occurred in the company's holding company structure during the three months ended March 31, 2024 - No changes occurred in the company's holding company structure during Q1 2024[180] Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries For details on cash and other asset transfers, readers are directed to the 2023 Form 10-K, indicating no new material information for the current quarter - For details on cash and other asset transfers, refer to the 2023 Form 10-K[181] Commitments and Contingencies The company faces potential CSRC fines for untimely Nasdaq listing filings and has a construction commitment of RMB5.0 million ($0.7 million) - The company failed to timely complete CSRC filing procedures for its Nasdaq listing, potentially facing fines of RMB 1 million to RMB 10 million[182][183] - As of March 31, 2024, the company has a construction commitment of RMB5.0 million (equivalent to $0.7 million)[185] Off Balance Sheet Arrangements The company has no off-balance sheet arrangements - The company has no off-balance sheet arrangements[186] Critical Accounting Policies No material changes to critical accounting estimates have occurred since the 2023 Form 10-K, with financial statement preparation relying on management judgments and estimates - No material changes to critical accounting estimates have occurred since the 2023 Form 10-K[187] - Financial statement preparation involves management judgments, assumptions, and estimates in conformity with GAAP[187] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for smaller reporting companies - This item is not applicable for smaller reporting companies[188] Item 4. Controls and Procedures The company's disclosure controls were ineffective as of March 31, 2024, due to material weaknesses, with management implementing remediation plans - Disclosure controls and procedures were not effective as of March 31, 2024, due to identified material weaknesses[190] - Material weaknesses include inadequate segregation of duties, lack of formal policies and procedures, and insufficient risk assessment procedures on internal controls[193][197] - Remediation plans include engaging a third-party financial consulting firm, identifying skill gaps, developing internal control policies, and hiring an assistant financial controller[194][198] Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were deemed ineffective as of March 31, 2024, due to a material weakness, though management believes financial statements are fairly presented - Disclosure controls and procedures were deemed ineffective as of March 31, 2024, due to a material weakness[190] - Despite the material weakness, management believes the unaudited condensed consolidated financial statements fairly represent the company's financial condition and results[191] Material Weakness Material weaknesses in internal control over financial reporting include inadequate segregation of duties, lack of formal policies, and insufficient risk assessment - Material weaknesses in internal control over financial reporting were identified, including inadequate segregation of duties, lack of formal policies, and insufficient risk assessment[192][193][197] - These deficiencies create a reasonable possibility that material misstatements in financial statements will not be prevented or detected on a timely basis[192] Management's Plan to Remediate the Material Weakness Management is implementing remediation plans, including engaging financial consulting, identifying skill gaps, developing policies, and hiring an assistant financial controller - Management is implementing remediation plans, including engaging a third-party financial consulting firm and identifying skill gaps[194][198] - Further steps include developing and monitoring internal control policies and procedures, and hiring an assistant financial controller familiar with US GAAP and English[198] - The company acknowledges that remediation will take time and cannot guarantee immediate success or effectiveness of internal controls[195] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during Q1 2024, apart from ongoing remediation efforts for the identified material weakness - No material changes in internal control over financial reporting occurred during Q1 2024, apart from ongoing remediation efforts for the identified material weakness[197] PART II - OTHER INFORMATION This section covers non-financial information, including legal proceedings, updated risk factors, equity sales, and other regulatory disclosures - This section addresses legal proceedings, risk factors, equity sales, and other regulatory disclosures[199][200][202][210][217] Item 1. Legal Proceedings The company may face adverse impacts from legal actions in the ordinary course of business, with further details provided in Note 12 of the financial statements - The company may face legal proceedings in the ordinary course of business, which can adversely impact operations[200] - Additional information on legal proceedings is provided in Note 12 of the financial statements[201] Item 1A. Risk Factors New and updated risk factors include potential expenses and delays from auditor dismissal, inability to collect judgments against the former auditor, and possible Chinese government fines for filing failures - Dismissal of BF Borgers as auditor may cause significant expenses, delays in financings/SEC filings, and affect stock price and market access[203] - There is a risk of being unable to exercise effective remedies or collect judgments against BF Borgers due to their permanent bar from practicing before the SEC[205] - The company may face fines from the Chinese government (RMB 1 million to RMB 10 million) for failing to timely complete CSRC filing obligations for its overseas listing, with substantial uncertainties in regulation interpretation[206][209] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not undertake any unregistered sales of equity securities or repurchase any shares of its common stock during the quarter ended March 31, 2024 - No unregistered sales of equity securities occurred during Q1 2024[210] - The company did not repurchase any shares of its common stock during Q1 2024[211] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the quarter ended March 31, 2024 - No defaults upon senior securities were reported[212] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[214] Item 5. Other Information This item is not applicable to the company - This item is not applicable[215] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL documents - The report includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[217] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase, and Cover Page Interactive Data File) are filed as exhibits[217] Signatures The Quarterly Report was signed on June 14, 2024, by Zongyi Lian, Chief Executive Officer and President, and Yuhua Huang, Chief Financial Officer - The Quarterly Report was signed by Zongyi Lian (CEO and President) and Yuhua Huang (CFO) on June 14, 2024[220]