Wetouch(WETH) - 2025 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from expectations - Key risks include significant reliance on top customers, potential uncollectible accounts receivable, fines from the Chinese government, challenges in maintaining product quality, intense competition, need for additional financing, risks related to new facility construction, potential revocation of tax treatments, supply chain disruptions, raw material cost fluctuations, and reliance on key executives[10] - Additional risks involve the absence of long-term supplier contracts, failure to adopt new technologies, lack of business liability insurance, adverse regulatory developments in Mainland China, potential delisting under the HFCAA, and uncertainties in China's economic, political, social, and legal systems, as well as exchange rate fluctuations[13] PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including Balance Sheets, Income Statements, Equity Changes, and Cash Flows, along with detailed accounting policy notes Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets show an increase in total assets and stockholders' equity as of June 30, 2025, compared to December 31, 2024, driven primarily by an increase in cash and accounts receivable Condensed Consolidated Balance Sheet Highlights (in US$) | Metric | June 30, 2025 (Unaudited) | December 31, 2024 | | :-------------------------------- | :------------------------ | :------------------ | | ASSETS | | | | Cash | $110,452,470 | $103,760,324 | | Accounts receivable, net | $10,736,898 | $7,504,630 | | Total Current Assets | $123,159,576 | $114,139,861 | | Total Assets | $137,024,190 | $128,019,463 | | LIABILITIES & EQUITY | | | | Total Current Liabilities | $5,014,548 | $2,951,192 | | Total Liabilities | $5,219,006 | $3,433,798 | | Total Stockholders' Equity | $131,805,184 | $124,585,665 | Condensed Consolidated Statements of Income and Comprehensive Income Revenues slightly increased for Q2 2025, but gross profit and net income decreased, while for H1 2025, revenues, gross profit, and net income all increased Condensed Consolidated Statements of Income and Comprehensive Income Highlights (in US$) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenues | $12,419,455 | $12,234,575 | $27,709,033 | $27,111,834 | | Gross Profit | $4,111,511 | $4,860,818 | $9,753,142 | $8,198,776 | | Income from Operations | $3,082,904 | $3,725,228 | $7,055,638 | $6,030,303 | | Net Income | $2,241,828 | $2,701,694 | $4,804,550 | $3,260,564 | | Basic EPS | $0.19 | $0.23 | $0.40 | $0.29 | | Diluted EPS | $0.19 | $0.23 | $0.40 | $0.29 | Condensed Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity increased from December 31, 2024, to June 30, 2025, driven by net income and positive foreign currency translation adjustments Stockholders' Equity Changes (in US$) | Metric | Balance as of Dec 31, 2024 | Net Income (Q1 2025) | FX Adjustment (Q1 2025) | Balance as of Mar 31, 2025 | Net Income (Q2 2025) | FX Adjustment (Q2 2025) | Balance as of Jun 30, 2025 | | :-------------------------- | :------------------------- | :------------------- | :---------------------- | :------------------------- | :------------------- | :---------------------- | :------------------------- | | Total Stockholders' Equity | $124,585,665 | $2,562,722 | $732,380 | $127,880,767 | $2,241,828 | $1,682,589 | $131,805,184 | Condensed Consolidated Statements of Cash Flows The company generated positive operating cash flow for H1 2025, with minimal investing and financing activities, resulting in a net increase in cash Condensed Consolidated Statements of Cash Flows Highlights (in US$) | Cash Flow Activity | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by (used in) operating activities | $4,676,400 | $(5,335,907) | | Net cash used in investing activity | $- | $(114,762) | | Net cash provided by financing activities | $- | $7,852,960 | | Effect of changes of foreign exchange rates on cash | $2,015,746 | $(2,068,543) | | Net increase in cash | $6,692,146 | $333,748 | | Cash, end of period | $110,452,470 | $98,374,302 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of financial statement figures, covering business, accounting policies, asset/liability accounts, related party transactions, income taxes, equity, and risks NOTE 1 — BUSINESS DESCRIPTION Wetouch Technology Inc., a Nevada holding company, operates through its PRC subsidiary Sichuan Vtouch, focusing on touchscreen display R&D, manufacturing, and distribution - Wetouch Technology Inc. (formerly Gulf West Investment Properties, Inc.) was incorporated in August 1992 in Nevada[24] - On October 9, 2020, the Company completed a reverse merger with BVI Wetouch, making BVI Wetouch a wholly-owned subsidiary[25] - Sichuan Wetouch (now Sichuan Vtouch) is primarily engaged in the R&D, manufacture, and distribution of touchscreen displays for financial terminals, automotive, POS, gaming, lottery, medical, HMI, and other specialized industries[26] - In March 2021, Sichuan Wetouch was under a government-directed relocation order, and Sichuan Vtouch took over its operating business. Sichuan Wetouch was deconsolidated on March 30, 2023[32][33] NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation, consolidation principles, use of estimates, significant accounting policies, and recent accounting pronouncements - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP, with certain information condensed or omitted as permitted by SEC rules[37] - Sichuan Wetouch was deconsolidated on March 30, 2023, as the Company no longer operated or controlled it, resulting in nil gain or loss from deconsolidation[39][40] - The Company adopted ASU No. 2016-02, Leases (Topic 842), recognizing right-of-use assets and lease liabilities on the balance sheet, and elected certain practical expedients for transition[43][45] - The Company's Chief Executive Officer (CEO) is the CODM, who reviews consolidated results. The Company has only one reporting segment: the touchscreen business, as all assets are in the PRC[46][47] - Recent accounting pronouncements, ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes), did not have a material impact on the Company's consolidated financial statements[48][49] NOTE 3 — ACCOUNTS RECEIVABLE Accounts receivable, net, significantly increased from December 31, 2024, to June 30, 2025, particularly in current and 1-3 months past due categories Accounts Receivable, Net (in US$) | Metric | June 30, 2025 (Unaudited) | December 31, 2024 | | :---------------------- | :------------------------ | :------------------ | | Accounts receivable, net | $10,736,898 | $7,504,630 | Aging of Accounts Receivable (in US$) | Aging Category | June 30, 2025 (Unaudited) | December 31, 2024 | | :--------------- | :------------------------ | :------------------ | | Current | $5,997,500 | $3,726,124 | | 1-3 months past due | $4,739,398 | $2,536,815 | | 4-6 months past due | $- | $1,241,691 | | Total | $10,736,898 | $7,504,630 | NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets decreased due to the full amortization of prepaid consulting service fees by June 30, 2025 Prepaid Expenses and Other Current Assets (in US$) | Item | June 30, 2025 (Unaudited) | December 31, 2024 | | :---------------------------------- | :------------------------ | :------------------ | | Advance to suppliers | $213,551 | $252,618 | | Prepayment for land use right | $547,941 | $537,755 | | Security deposit | $54,861 | $53,840 | | Prepaid consulting service fees | $- | $884,687 | | Prepaid market research fees | $955,000 | $955,000 | | Others receivable | $53,191 | $78,680 | | Total Prepaid expenses and other current assets | $1,824,544 | $2,762,580 | - Prepaid consulting service fees of $884,687 as of December 31, 2024, have been fully amortized by June 30, 2025[55][56] - The Company has a prepayment for land use rights ($547,941) for a new facility, expected to be reclassified to intangible assets by H2 2026, and a security deposit ($54,861) for a construction license, expected to be refunded by H2 2025[56] NOTE 5 — PROPERTY, PLANT AND EQUIPMENT, NET Net property, plant, and equipment increased slightly, primarily due to ongoing construction in progress for the new facility Property, Plant and Equipment, Net (in US$) | Item | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Buildings | $12,022 | $11,798 | | Machinery and equipment | $7,817 | $7,672 | | Vehicles | $40,875 | $40,114 | | Construction in progress | $12,997,423 | $12,755,791 | | Subtotal | $13,058,137 | $12,815,375 | | Less: accumulated depreciation | $(38,010) | $(32,378) | | Property, plant and equipment, net | $13,020,127 | $12,782,997 | - Depreciation expense for the six months ended June 30, 2025, was $4,957, up from $4,798 in the prior year[57] - As of June 30, 2025, the Company had a commitment of $0.7 million for construction in progress of its new facility[58] NOTE 6 — OPERATING LEASE The Company continues to lease property due to new facility construction delays, recognizing operating lease expenses and liabilities per ASU 2016-02 - The Company is under a government-directed relocation order and is constructing a new facility, with completion rescheduled to end of December 31, 2025, and production commencing in Q2 2026[59][61] - The lease for the current property has been renewed multiple times, with the latest extension to October 31, 2025, at a monthly rent of RMB 400,000 ($55,837)[60] Lease Expense and Liabilities (in US$) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Operating lease expense | $156,869 | $- | $308,244 | $- | | Short-term lease expense | $- | $146,643 | $- | $294,372 | | Total lease expense | $156,869 | $146,643 | $308,244 | $294,372 | | Operating lease right-of-use assets (June 30, 2025) | $813,516 | | | | | Operating lease right-of-use assets (Dec 31, 2024) | | | | $1,055,208 | | Total operating lease liabilities (June 30, 2025) | $813,517 | | | | | Total operating lease liabilities (Dec 31, 2024) | | | | $1,054,145 | NOTE 7 — RELATED PARTY TRANSACTIONS Amounts due to related party Chengdu Wetouch Intelligent Optoelectronics Co., Ltd. significantly increased from December 31, 2024, to June 30, 2025 Amounts Due to Related Party (in US$) | Related Party | Relationship | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------------------------------------------ | :------------ | :---------------- | | Chengdu Wetouch Intelligent Optoelectronics Co., Ltd. | An affiliate of Ms. Jiaying Cai, director of the Company | $642,634 | $149,211 | NOTE 8 — INCOME TAXES Company subsidiaries are subject to varying income tax rates across jurisdictions, with a 32.8% effective tax rate for H1 2025 - Wetouch is subject to a 21% U.S. federal income tax rate, BVI Wetouch is not subject to income tax, and HK Wetouch is subject to a 16.5% profit tax in Hong Kong[66][67][68] - PRC subsidiaries (Sichuan Wetouch and Sichuan Vtouch) are generally subject to a 25% CIT rate, though Sichuan Wetouch previously qualified for a 15% HNTE rate until October 20, 2023[69][70][71] Income Tax Provision (in US$) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | PRC income tax provision | $860,267 | $1,099,331 | $2,336,755 | $1,761,179 | | Deferred income tax expenses | $16,455 | $- | $11,073 | $- | | Total Income tax provision | $876,722 | $1,099,331 | $2,347,828 | $1,761,179 | Effective Tax Rate Reconciliation | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | PRC statutory income tax rate | 25.0% | 25.0% | 25.0% | 25.0% | | Income tax computed at PRC statutory corporate income tax rate of 25% | 28.0% | 28.9% | 30.0% | 35.3% | | Effective tax rate | 28.1% | 28.9% | 32.8% | 35.1% | Deferred Tax Assets, Net (in US$) | Item | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Total gross deferred tax assets | $231,474 | $305,199 | | Deferred tax liabilities | $(200,883) | $(263,802) | | Deferred tax assets, net | $30,591 | $41,397 | NOTE 9 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities significantly increased, driven by higher other payables to third parties and other tax payables Accrued Expenses and Other Current Liabilities (in US$) | Item | June 30, 2025 | December 31, 2024 | | :---------------------------------- | :------------ | :---------------- | | Advance from customers | $- | $166,535 | | Accrued payroll and employee benefits | $82,340 | $81,837 | | Accrued legal compensation charges | $- | $35,356 | | Accrued professional fees | $148,199 | $57,173 | | Accrued director fees | $58,417 | $66,734 | | Other payable to third parties | $629,694 | $147,102 | | Other tax payables | $344,175 | $162,888 | | Others | $145,245 | $248,836 | | Total Accrued expenses and other current liabilities | $1,408,070 | $966,461 | NOTE 10 — CONVERTIBLE PROMISSORY NOTES PAYABLE Convertible promissory notes issued in 2021 were fully repaid by February 2024, and most associated warrants expired or were exercised by June 2024 - In 2021, the Company issued seven convertible promissory notes totaling $2.25 million, bearing 8.0% interest, with a default rate of 16%[78][79] - The notes were convertible into common stock at a price based on an Uplist Offering or $15.0 per share[80] - On February 23, 2024, the Company made a full payment of $2,586,960 for the remaining five outstanding promissory notes, including principal and accrued interest/default charges[87] - The Company also issued three-year warrants to purchase 90,000 shares of common stock to lenders, with an exercise price of $25 per share (subject to adjustment)[89][90] - During the six months ended June 30, 2024, one lender exercised warrants for 2,725 shares, and the remaining 38,430 Note Warrants expired[95] NOTE 11 — STOCKHOLDERS' EQUITY This note details common stock changes, including issuances, reverse stock splits, the 2024 Public Offering, and statutory reserve requirements - As of June 30, 2025, there were 11,931,534 shares of common stock issued and outstanding, with a par value of $0.001[101] - The Company effected a 1-for-20 reverse stock split on September 12, 2023, retrospectively adjusting all share information[103] - On February 23, 2024, the Company closed a public offering of 2,160,000 shares at $5.00 per share, generating $10.8 million gross proceeds, with $1,810,246 in issuance costs charged to additional paid-in capital[104][105] - Under PRC rules, companies must appropriate 10% of net income to a statutory surplus reserve until it reaches 50% of registered capital; this reserve is non-distributable as cash dividends[106][107] NOTE 12 — SHARE BASED COMPENSATION Share-based compensation is accounted for using ASC 718, with warrants for services exercised or expired by June 30, 2024 - The Company uses the Black-Scholes model to estimate the fair value of share-based compensation awards[109][111][113] - Warrants for 35,861 shares related to consulting services were exercised during the six months ended June 30, 2024, with no remaining warrants related to services as of that date[114] NOTE 13 — WEIGHTED AVERAGE NUMBER OF SHARES Weighted-average shares outstanding are computed per ASC 260, with retrospective adjustments for the reverse merger - The weighted-average number of shares outstanding is computed based on ASC 260, adjusting for the reverse merger by using the legal acquiree's shares multiplied by the exchange ratio for the pre-acquisition period[115] NOTE 14 — RISKS AND UNCERTAINTIES The Company faces financial risks including credit, interest rate, currency, and significant customer and supplier concentration - The Company's cash is primarily held in PRC state-owned banks, which are insured up to RMB500,000[117] - A majority of the Company's revenue and expenses are denominated in RMB, which is not freely convertible, exposing the Company to currency risk[119] Customer Concentration (Revenue) | Period | Top 5 Customers (% of Revenue) | Top 10 Customers (% of Revenue) | | :--------------------------- | :----------------------------- | :------------------------------ | | 3 Months Ended June 30, 2025 | 22.0%, 16.2%, 15.7%, 14.5%, 12.0% | 99.6% | | 3 Months Ended June 30, 2024 | 21.2%, 19.5%, 16.0%, 14.5%, 12.1% | 100.0% | | 6 Months Ended June 30, 2025 | 21.5%, 16.6%, 15.8%, 14.9%, 12.2% | 99.4% | | 6 Months Ended June 30, 2024 | 21.9%, 20.0%, 15.2%, 13.9%, 11.6% | 99.3% | Supplier Concentration (Raw Material Purchases) | Period | Top Suppliers (% of Total Purchases) | | :--------------------------- | :----------------------------------- | | 3 Months Ended June 30, 2025 | 50.1% (four suppliers) | | 3 Months Ended June 30, 2024 | 27.1% (two suppliers) | | 6 Months Ended June 30, 2025 | 49.6% (four suppliers) | | 6 Months Ended June 30, 2024 | 40.3% (three suppliers) | NOTE 15 — COMMITMENTS AND CONTINGENCIES The Company has no material legal proceedings but a capital expenditure commitment for new facility construction - As of the report date, the Company is not aware of any material, active, pending, or threatened legal or administrative proceedings[125] - As of June 30, 2025, the Company had a capital expenditure commitment of RMB5.0 million (equivalent to $0.7 million) for construction in progress[126] NOTE 16 — SEGMENT REPORTING The Company operates a single touchscreen business segment with all long-lived assets in the PRC, generating revenue from both domestic and overseas markets - The Company's Chief Executive Officer (CEO) is the chief operating decision maker (CODM), and the Company operates in one operating segment: the touchscreen business[127] - All of the Company's long-lived assets are located in the People's Republic of China (PRC)[128] Geographical Revenue Information (in US$) | Region | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Sales in PRC | $8,414,927 | $7,867,625 | $18,715,995 | $17,242,097 | | Sales in Overseas | $4,004,528 | $4,366,950 | $8,993,038 | $9,869,737 | | Total Revenue | $12,419,455 | $12,234,575 | $27,709,033 | $27,111,834 | NOTE 17 — SUBSEQUENT EVENTS No subsequent events requiring accrual or disclosure were identified through the financial statement issuance date - No subsequent events occurred that require accrual or disclosure after the balance sheet date through the date the consolidated financial statements were issued[129] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews the Company's business, financial condition, and operating results for the three and six months ended June 30, 2025, including liquidity and critical accounting policies Overview Wetouch Technology Inc. operates its touchscreen business through its PRC subsidiary, Sichuan Vtouch, facing regulatory risks and funding new facility construction with existing cash - Wetouch is a Nevada holding company with operations primarily in mainland China through its subsidiary, Sichuan Vtouch, engaged in R&D, manufacturing, sales, and servicing of medium- to large-sized projected capacitive touchscreens[131][132] - The Company faces complex and evolving PRC laws and regulations, including restrictions on capital flows, dividend payments, currency conversion, cybersecurity, and data privacy[132] - As of June 30, 2025, the Company contributed RMB 348.0 million (US$47.7 million) to its PRC subsidiary, with no dividends distributed to date[132] - Domestic sales accounted for 67.7% and 66.7% of revenues for the three and six months ended June 30, 2025, respectively, with international sales covering Taiwan, South Korea, and Germany[133] - Construction of a new facility in Chengdu is expected to be completed by the end of 2025, with production commencing in Q2 2026, funded by existing cash and operating cash flows[135][136] Results of Operations - Three Months Ended June 30, 2025 Compared to Three Months Ended June 30, 2024 Q2 2025 saw slight revenue growth but decreased gross profit and net income, primarily due to higher cost of revenues and general and administrative expenses Key Financial Highlights (Three Months Ended June 30) (in US$ millions) | Metric | 2025 (in US$ millions) | 2024 (in US$ millions) | Change % | | :-------------------------- | :--------------------- | :--------------------- | :------- | | Revenues | $12.4 | $12.2 | 1.6% | | Cost of revenues | $(8.3) | $(7.4) | 12.2% | | Gross profit | $4.1 | $4.8 | (14.5)% | | Total operating expenses | $(1.0) | $(1.1) | (9.1)% | | Operating income | $3.1 | $3.7 | (16.2)% | | Net income | $2.2 | $2.7 | (18.5)% | - Revenues increased by 1.6% to $12.4 million, driven by a 5.1% increase in sales volume and a 0.2% positive exchange rate impact, partially offset by a 3.6% decrease in average selling price[140] - Gross profit decreased by 14.5% to $4.1 million, with gross profit margin falling to 33.1% from 39.7%, primarily due to a 12.8% increase in cost of goods sold (13.5% in raw materials, 3.3% in labor cost)[147] - Selling expenses decreased by 66.7% to $0.1 million due to reduced traveling expenses, while General and administrative expenses increased by 12.5% to $0.9 million due to higher professional fees[148][149] - Research and development expenses were nil in Q2 2025, down from $43,211 in Q2 2024[150] - Net income decreased by 18.5% to $2.2 million, and the effective income tax rate was 28.1% (vs. 28.9% in Q2 2024)[153][154] Results of Operations - Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024 H1 2025 revenues, gross profit, and net income increased, driven by higher sales volume and improved gross margin, despite increased general and administrative expenses Key Financial Highlights (Six Months Ended June 30) (in US$ millions) | Metric | 2025 (in US$ millions) | 2024 (in US$ millions) | Change % | | :-------------------------- | :--------------------- | :--------------------- | :------- | | Revenues | $27.7 | $27.1 | 2.2% | | Cost of revenues | $(18.0) | $(18.9) | (4.8)% | | Gross profit | $9.7 | $8.2 | 18.3% | | Total operating expenses | $(2.7) | $(2.2) | 22.7% | | Operating income | $7.0 | $6.0 | 16.7% | | Net income | $4.8 | $3.3 | 45.5% | - Revenues increased by 2.2% to $27.7 million, primarily due to an 8.9% increase in total units sold, partially offset by a decrease in average RMB selling price and negative exchange rate impact[156] - Gross profit increased by 18.3% to $9.7 million, with gross profit margin rising to 35.2% from 30.2%, mainly due to increased revenues from high-end products[162] - Selling expenses decreased by 71.4% to $0.2 million due to reduced traveling expenses. General and administrative expenses increased by 92.3% to $2.5 million, driven by higher professional fees and amortization of prepaid marketing research fees[163][164] - Research and development expenses were nil in H1 2025, down from $85,949 in H1 2024[165] - Net income increased by 45.5% to $4.8 million, and the effective income tax rate was 32.8% (vs. 35.1% in H1 2024)[169][170] Liquidity and Capital Resources The Company maintains strong liquidity with significant cash, generating positive operating cash flow in H1 2025, with minimal investing and financing activities - As of June 30, 2025, current assets were $123.2 million (including $110.5 million in cash), and current liabilities were $5.0 million[173] Cash Flow Summary (Six Months Ended June 30) (in US$ millions) | Cash Flow Activity | 2025 (in US$ millions) | 2024 (in US$ millions) | | :--------------------------------------- | :--------------------- | :--------------------- | | Net cash provided by (used in) operating activities | $4.7 | $(5.3) | | Net cash used in investing activities | $(0.0) | $(0.1) | | Net cash provided by financing activities | $0.0 | $7.8 | | Effect of foreign currency exchange rate changes on cash | $2.0 | $(2.1) | | Net increase in cash and cash equivalents | $6.7 | $0.4 | | Cash and cash equivalents at the end of period | $110.5 | $98.4 | - Net cash provided by operating activities was $4.7 million in H1 2025, a significant improvement from net cash used of $5.3 million in H1 2024[175] - The positive operating cash flow in H1 2025 was driven by net income, amortization of operating right-of-use assets, decreased prepaid expenses, and increased accounts payable and accrued liabilities, partially offset by increased accounts receivable[176] - Days Sales Outstanding (DSO) increased to 89 days for the six months ended June 30, 2025, from 64 days for the year ended December 31, 2024[180] - The Company expects existing cash, operating cash flows, and bank borrowings to meet liquidity requirements for at least the next 12 months[182][184] Critical Accounting Policies No material changes to critical accounting estimates have occurred since the 2024 Form 10-K, as detailed in Note 2 of the financial statements - The Company's critical accounting policies involve judgments, assumptions, and estimates affecting reported amounts, as detailed in Note 2 of the financial statements[189] - No material changes to critical accounting estimates have occurred since the 2024 Form 10-K[189] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for smaller reporting companies - This section is not applicable for smaller reporting companies[190] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective as of June 30, 2025, due to material weaknesses in financial reporting personnel and risk assessment, with ongoing remediation efforts - As of June 30, 2025, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective due to identified material weaknesses[191] - Despite the material weakness, management believes the unaudited condensed consolidated financial statements fairly represent the Company's financial condition, results of operations, and cash flows[192] - Material weaknesses identified include a lack of competent financial reporting and accounting personnel with U.S. GAAP understanding and a lack of risk assessment procedures on internal controls[195][196] - Management is implementing measures to remediate these weaknesses, including identifying skill gaps, cooperating with operation teams for control environment, and establishing SOX compliance procedures[198][202] - Remediation efforts are ongoing, and the Company cannot assure that internal control over financial reporting will be effective as a result of these efforts[199] PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any material legal or administrative claims or proceedings - As of the date of this Quarterly Report, the Company is not aware of any material, active, pending, or threatened legal proceedings[205] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or common stock repurchases occurred during the three and six months ended June 30, 2025 - No unregistered sales of equity securities occurred during the three and six months ended June 30, 2025[205] - The Company did not repurchase any shares of its common stock during the three and six months ended June 30, 2025[206] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[207] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This section is not applicable[208] Item 5. Other Information No other information is reported under this item - No other information is applicable[209] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report, including organizational documents, stock certificates, warrants, and certifications - The exhibits include Amended and Restated Articles of Incorporation, Bylaws, Specimen Common Stock Certificate, Underwriter's Warrants, Common Stock Purchase Warrants, and various certifications (e.g., 302 and 906 certifications) and XBRL documents[210] SIGNATURES The Quarterly Report was signed by CEO Zongyi Lian and CFO Xing Tang on October 9, 2025 - The Quarterly Report was signed on October 9, 2025, by Zongyi Lian (CEO and President) and Xing Tang (CFO)[213]