Wetouch Technology Inc.: Form 10-Q for the period ended Jun 30, 2024

The discussion should be read in conjunction with the Company’s consolidated financial statements and the notes presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from those expressed, implied or anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission. See “Cautionary Note Regarding Forward Looking Statement.”

Overview

We were originally incorporated under the laws of the state of Nevada in August 1992. On October 9, 2020, we entered into a share exchange agreement (the “Share Exchange Agreement”) with BVI Wetouch and all the shareholders of BVI Wetouch, to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange for the issuance to such shareholders an aggregate of 28 million shares of our common stock (the “Reverse Merger”). The Reverse Merger closed on October 9, 2020. As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned subsidiary.

Through our wholly-owned subsidiaries, BVI Wetouch, HK Wetouch, Sichuan Wetouch, and Sichuan Vtouch, we are engaged in the research, development, manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens, which constitutes our source of revenues. We are specialized in large-format touchscreens, which are developed and designed for a wide variety of markets and used in by the financial terminals, automotive, POS, gaming, lottery, medical, HMI, and other specialized industries. Our product portfolio comprises medium to large sized projected capacitive touchscreens ranging from 7.0 inch to 42 inch screens. In terms of the structures of touch panels, we offer (i) Glass-Glass (“GG”), primarily used in GPS/car entertainment panels in mid-size and luxury cars, industrial HMI, financial and banking terminals, POS and lottery machines; (ii) Glass-Film-Film (“GFF”), mostly used in high-end GPS and entertainment panels, industrial HMI, financial and banking terminals, lottery and gaming industry; (iii) Plastic-Glass (“PG”), typically adopted by touchscreens in GPS/entertainment panels motor vehicle GPS, smart home, robots and charging stations; and (iv) Glass-Film (“GF”), mostly used in industrial HMI.

On July 16, 2023, the Company’s board of directors approved a reverse stock split of the Company’s common stock at a ratio of 1-for-20. On July 16, 2023, the Company filed a certificate of change (with an effective date of July 16, 2023) with the Nevada Secretary of State pursuant to Nevada Revised Statutes 78.209 to effectuate a 1-for-20 reverse stock split of its outstanding common stock. On September 11, 2023, the Company received a notice from FINRA/OTC Corporate Actions the reverse split would take effect at the open of business on September 12, 2023, and the reverse stock that split took effect on that date. All share information included in this Quarterly Report has been reflected as if the reverse stock splits occurred as of the earliest period presented.

Construction of our new facility

We have been actively engaged in the construction of our new production facilities and office buildings in Chengdu Medicine City (Technology Park), Wenjiang District, Chengdu, Sichuan Province, Peoples’s Republic of China since the summer of 2023.

As of the date of this Quarterly Report, we anticipate to complete the building construction, including the newly planned touch machine construction area by the end of the first quarter of 2025 and commence production in the third quarter of 2025.

Highlights for the three months ended June 30, 2024 include:

• Revenues were $12.2 million, a decrease of 4.7% from $ 12.8 million in the second quarter of 2023
• Gross profit was $4.9 million, a decrease of 22.2% from $ 6.3 million in the second quarter of 2023
• Gross profit margin was 39.7% as compared to 49.0% in the second quarter of 2023
• Net income was $2.7 million, a decrease of 42.5% from $ 4.7 million in the second quarter of 2023
• Total volume shipped was 585,705 units, a decrease of 0.8% from 590,140 units in the second quarter of 2023

Results of Operations

The following table sets forth, for the periods indicated, statements of income data:

2

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Revenues

We generated revenue of $12.2 million for the three months ended June 30, 2024, a decrease of $0.6 million, or 4.7%, compared to $12.8 million in the same period of last year. This was due to a decrease of 0.8% in sales volume, a decrease of 1.1% in the average selling price of our products, and 3.3% negative impact from exchange rate due to depreciation of RMB against US dollars, compared with that of the same period of last year.

(i) PRC market

For the three months ended June 30, 2024, revenue from domestic market decreased by $1.2 million or 13.2% as a combined result of: (i) a decrease of 11.3% in sales volume due to lower sales volume of POS touchscreens, industrial control computer touchscreens, and multi-functional printer touchscreens, (ii) 3.3% negative impact from exchange rate due to depreciation of RMB against US dollars, partially offset by an increase of 0.5% in the average RMB selling price of our products, compared with those of the same period of last year.

As for the RMB selling price, the increase of 0.5% was mainly due to the increased sales of new models of higher-end products such as medical touchscreen, POS touchscreens and multi-functional printer touchscreens with higher selling prices in the domestic market during the three months ended June 30, 2023.

The weakening in macroeconomic conditions in China since the outbreak of COVID-19 in January 2020 continued to exacerbate the touch screen business environment. We had sales decrease of 20.8% in South China, 6.6% in South China, 9.4% in Southwest China, and 9.0% in Eastern China during the second quarter ended June 30, 2024 as compared to that of last year, mainly due to overall weaker market demand resulted in reduced sales orders during the second quarter of 2024.

(ii) Overseas market

For the three months ended June 30, 2024, revenues from the overseas market were $4.3 million as compared to $3.7 million of the same period of 2023, representing (i) an increase by $0.6 million, or 16.2%, mainly due to an increase of 24.8% in sales volume, particularly in gaming touchscreens and automotive touchscreens, partially offset by (ii) a decrease of 1.5% in average RMB selling price in these touchscreen products, and (iii) 3.3% negative impact from exchange rate due to depreciation of RMB against US dollars, compared with those of the same period of last year.

The following table summarizes the breakdown of revenues by categories in US dollars:

The Company continued to shift production mix from traditional lower-end products to high-end products such as gaming touchscreens and automotive touchscreens, primarily due to (i) greater growth potential of computer screen models in China and overseas market, and (ii) the stronger demand on higher-end touch screens made with better materials and better quality.

Gross Profit and Gross Profit Margin

(in millions, except percentage)

Gross profit was $4.8 million in the second quarter ended June 30, 2024, compared to $6.3 million in the same period of 2023. Our gross profit margin decreased to 39.7% for the second quarter ended June 30, 2024, as compared to 49.0% for the same period of 2023, primarily due to the increase of cost of goods sold by 41.5% resulting from the increase of 43.3% in costs of raw materials, mainly driven by 44.4% increase in chip cost.

Selling Expenses

Selling expenses were $289,716 for the three months ended June 30, 2024, compared to $81,360 in the same period in 2023, representing an increase of $0.2 million, or 256.1%. The increase was primarily due to the increase of $0.2 million traveling expenses and logistic expenses to market our products during the three months ended June 30,2024.

General and Administrative Expenses

General and administrative expenses were $802,663 for the three months ended June 30, 2024, compared to $56,907 in the same period in 2023, representing an increase of $0.7 million, or 1,310.5%. The increase was primarily due to $0.5 million consulting service fees (see Note 4-(iii) of the accompanying financial statements) and $0.2 million professional fees during the three months ended June 30, 2024.

Research and Development Expenses

Research and development expenses were $43,211 for three months ended June 30, 2024 compared to $20,384 in the same period in 2023, representing an increase of $22,827, or 112.0%, which was due to an increase in R&D material consumption.

Operating Income

Total operating income was $3.7 million for the three months ended June 30, 2024 as compared to $6.1 million of the same period of last year, primarily due to lower gross margin and higher selling expenses, general and administrative expenses and research & development expenses for the three months ended June 30, 2024.

Gain on Changes in Fair Value of Common Stock Purchase Warrants

Gain on changes in fair value of common stock purchase warrants for the three months ended June 30, 2024 and 2023 was $37,751 and $142386, respectively.

(See Note 9 (b) of the accompanying financial statements).

Income Taxes

(in millions, except percentage)

The effective income tax rates for the three months ended June 30, 2024 and 2023 were 28.9% and 28.3%, respectively.

Net Income

As a result of the above factors, we had a net income of $2.7 million in the second quarter of 2024 compared to a net income of $4.7 million in the same quarter of 2023.

Results of Operations - Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Revenues

We generated revenue of $27.1 million for the six months ended June 30, 2024, an increase of $0.9 million, or 3.4%, compared to $26.2 million in the same period of last year. This was mainly due to an increase of 3.4% in sales volume, and an increase of 4.2% in the average RMB selling price of our products, partially offset by 4.1% negative impact from exchange rate due to depreciation of RMB against US dollars, compared with those of the same period of last year.

(i) PRC market

For the six months ended June 30, 2024, revenue from PRC market decreased by $1.2 million or 6.5% as a combined result of (i) a decrease of 4.6% in sales volume, particularly in multi-functional printer touchscreens and automotive touchscreens, (ii) 4.1% negative impact from exchange rate due to depreciation of RMB against US dollars, and partially offset by (iii) an increase of 2.4% in the average RMB selling price of our products, compared with those of the same period of last year.

As for the RMB selling price, the increase of 2.4% was mainly due to the increased sales of new models of higher-end products such as medical touchscreens and automotive touchscreens with higher selling prices in the domestic market during the three months ended June 30, 2024

The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic in January 2020 continued to exacerbate the touch screen business environment. We had sales decrease of 6.7% in South China, 5.1% in East China, partially offset by our sales increase of 3.8% in Southwest China, during the six months ended June 30, 2023.

(ii) Overseas market

For the six months ended June 30, 2024, revenues from overseas market was $9.9 million as compared to $7.8 million of the same period of 2022, representing (i) an increase by $2.1 million or 26.9% mainly due to an increase of 21.1% in sales volume, particularly in gaming touchscreens, and automotive touchscreens and industrial control touchscreens, (ii) 8.7% increase in average RMB selling price in these touchscreen products during the six months ended June 30, 2024, partially offset by (iii) the 4.1% negative impact from exchange rate due to depreciation of RMB against US dollars ,compared with those of the same period of last year.

The following table summarizes the breakdown of revenues by categories in US dollars:

The Company continued to shift production mix from traditional lower-end products such as touchscreens used in industrial control computer industries to high-end products such as automotive touchscreens and gaming touchscreen, primarily due to (i) greater growth potential of computer screen models in China, (ii) the stronger demand on higher-end touch screens made with better materials and better quality.

Gross Profit and Gross Profit Margin

(in millions, except percentage)

Gross profit was $8.2 million during the six months ended June 30, 2023, compared to $12.3 million in the same period of 2023. Our gross profit margin increased to 46.9% for the second quarter ended June 30, 2023, as compared to 39.4% for the same period of 2022, primarily due to the increase in sales of 10.5%, particularly high-end products such as POS touchscreens, medical touchscreens, and automotive touchscreens, for the six months ended June 30, 2023, partially offset by the increase in cost of goods sold by 2.8% including increase of cost of materials such as chip cost by 2.7%, for the six months ended June 30, 2023.

General and Administrative Expenses

(in millions, except percentage)

General and administrative (G&A) expenses were $1.3 million for the six months ended June 30, 2024, compared to $1.7 million in the same period in 2023, representing a decrease of $0.4 million or 23.5%. The decrease was primarily due to (i) the payment of private placement agent fees of $1.2 million related to the consent agreement with representatives of an investment (see Note 8) during the six months ended June 30, 2023, ii) the increase of $0.7 million consulting service fees (see Note 4-(iii) of the accompanying financial statements) and iii) $0.1 million professional fees during the six months ended June 30, 2024.

Research and Development Expenses

Research and development (R&D) expenses were $85,949 for the six months ended June 30, 2024 compared to $41,269 in the same period in 2023, mainly due to an increase in R&D material consumption.

Operating Income

Total operating income was $6.0 million for the six months ended June 30, 2024 as compared to $10.4 million of the same period of last year due to lower gross profit, higher selling expenses and research and development expenses, partially offset by lower general & administration expenses.

Gain on changes in fair value of Common Stock Purchase Warrants

Gain on changes in fair value of common stock purchase warrants was $45,572 and $44,784 for the six months ended June 30, 2024 and 2023, respectively (See Note 9 (b)).

Interest Expenses

(in millions, except percentage)

For the six months ended June 30, 2024 and 2023, the Company recognized interest expenses of convertible promissory notes in the amount of $1,169,974 (mainly the default interest charges of $1,145,995 upon the repayment of the notes payable) and $71,507, respectively. (See Note 9 (a) of the accompanying financial statements).

Income Taxes

(in millions, except percentage)

The effective income tax rates for the six months ended June 30, 2024 and 2023 were 25.4% and 28.4%, respectively.

Our PRC subsidiary Sichuan Vtouch had $98.4 million of cash of June 30, 2024, which are planned to be indefinitely reinvested in PRC. The distributions from our PRC subsidiary are subject to the U.S. federal income tax at 21%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of our PRC subsidiaries.

Net Income

As a result of the above factors, we had a net income of $3.3 million in the six months ended June 30, 2024 compared to a net income of $7.5 million in the same period of 2023.

Liquidity and Capital Resources

Historically, our primary uses of cash have been to finance working capital needs. We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings.

We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all.

As of June 30, 2024, we had current assets of $113.2 million, consisting of $98.4 million in cash, $10.8 million in accounts receivable, $0.2 million in inventories, and $3.8 million in prepaid expenses and other current assets Our current liabilities as of June 30, 2024 were $3.1 million, which is comprised of $0.9 million in accounts payable, $0.4 million in loan from a third party, $0.3 million due to a related party, $1.1 million in income tax payable, and $0.4 million in accrued expenses and other current liabilities.

The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2024 and 2023:

Operating Activities

Net cash used in operating activities was $5.3 million for the six months ended June 30, 2024 as compared to $6.8 million provided by operating activities for the same period of the last year, primarily due to (i) the decrease of $4.2 million net income for the six months ended June 30, 2024 as compared to the same period of 2023, (ii) the increase of $0.2 million in inventories, and $3.2 million in prepaid and other current assets, (iii) the decrease of $0.8 million in accounts payable, $0.4 million in income tax payable, and $5.3 million in accrued expenses and other current liabilities, partially offset by (v) the decrease of $2.0 million in accounts receivable for the six months ended June 30, 2024

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2024 was $0.1 million for the purchase of property, plant and equipment.

There was no cash flow in investing activities for the six months ended June 30, 2023.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2024 was $7.8 million, including $9.0 million in net proceeds from the 2024 Public Offering and $0.3 million in proceeds from interest-free advances from a related party, partially offset by $1.4 million repayment of convertible promissory notes, and $82,864 repayment of interest-free advances to a third party.

Net cash provided by financing activities for the six months ended June 30, 2023 was $40.0 million, including $40.0 million in proceeds from stock issuance in a private placement, and $82,145 in proceeds from interest-free advances from a third party, partially offset by the repayment of $35,000 convertible promissory note payable.

As of June 30, 2024, our cash and cash equivalents were $94.8 million, as compared to $98.0 million at December 31, 2023.

Days Sales Outstanding (“DSO”) has decreased to 61 days for the six months ended June 30, 2024 from 77 days for the year ended December 31, 2023.

The following table provides an analysis of the aging of accounts receivable as of June 30, 2024 and December 31, 2023:

The majority of the Company’s revenues and expenses were denominated in Renminbi (“RMB”), the currency of the People’s Republic of China. There is no assurance that exchange rates between the RMB and the U.S. Dollar will remain stable. Inflation has not had a material impact on the Company’s business.

Based on past performance and current expectations, we believe our cash and cash equivalents provided by operating activities and financing activities will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations for at least the next 12 months.

Holding Company Structure

There have been no changes to the Company’s holding company structure during the six months ended June 30, 2024. For more details, refer to the Company’s holding company structure disclosures set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Holding Company Structure” of the 2023 Form 10-K.

Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries

Please see “ITEM 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations- Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries” of the 2023 Form 10-K for more details.

Commitments and Contingencies

Contingencies

The Company’s common stock began trading on the Nasdaq Capital Market under the ticker symbol “WETH” on February 21, 2024. The Company failed to timely complete the filing procedures with China Securities Regulatory Commission (“CSRC”) on overseas initial public offering and transfer of listing as regulated below:

1) Per Article 13 and Article 8 and Article 25 of CSRC Announcement (2023) No. 43 -Trial Measures for the Administration of Overseas Issuance and Listing of Securities for Domestic Enterprises” (“Trial Measures” Announcement No. 43), which was implemented on March 31, 2023 (http://www.csrc.gov.cn/csrc/c101954/c7124478/content.shtml), when an issuer conducts an overseas initial public offering or listing, it shall submit overseas issuance and listing application documents to CSRC within three working days; When a domestic enterprise transfers its listing overseas, it shall comply with the requirements of the overseas first public listing requirements for issuance and listing, and shall file with the CSRC within 3 working days, after its submitting application documents for transfer and listing overseas.

2) Article 27 of Trial Measures Announcement No. 43 stipulates that if a domestic enterprise violates the provisions of Article 13 of these Measures and fails to perform the filing procedures, or violates the provisions of Articles 8 and 25 of these Measures for overseas issuance and listing, CSRC shall order it to make corrections and give a warning, and impose a fine of not less than RMB 1 million but not more than RMB 10 million.

As of the date of this Quarterly Report, the Company has not received any notice of penalty from the CSRC. Management will closely monitor any notice or action from CSRC.

Capital Expenditure Commitment

As of June 30, 2024, the Company had commitment of RMB5.0 million (equivalent to $0.7 million) for construction in progress.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2023 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2023 Form 10-K.

Evaluation of Disclosure Controls and Procedures

Under supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (our “Certifying Officers”), we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2024, as a result of the material weakness identified below.

In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. GAAP. Based on such analysis and notwithstanding the identified material weakness, management, including our Chief Executive Officer and Chief Financial Officer, believe the unaudited condensed consolidated financial statements included in this Quarterly Report fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

Material Weakness

In connection with the audit of the financial year ended December 31, 2023, we identified certain control deficiencies in the design and operation of our internal controls over our financial reporting that constituted a material weakness in aggregation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses related to internal control over financial reporting that was identified during the annual report of 2023 and still applied as of June 30, 2024 were:

• Inadequate segregation of duties consistent with control objectives;
• Lack of formal policies and procedures; and
• Lack of risk assessment procedures on internal controls to detect financial reporting risks on a timely manner.

As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements.

Management’s Plan to Remediate the Material Weakness

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:

• Identify gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and
• Continue to develop policies and procedures on internal control over financial reporting and monitor the effectiveness of operations on existing controls and procedures;

During the six months ended June 30, 2024, the management has not addressed the material weaknesses on internal control and will continue to implement the above improvement plans to ensure our financial reporting in compliance with US GAAP and SEC filing requirements.

The Company recognizes that the material weaknesses in its internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period of time and can be tested and concluded by management to be designed and operating effectively. Because the Company’s remediation efforts are ongoing, it cannot provide any assurance that these remediation efforts will be successful or that its internal control over financial reporting will be effective as a result of these efforts.

The Company will continue to evaluate and work to improve its internal control over financial reporting related to the identified material weaknesses, and management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. The Company will report the progress and status of the above remediation efforts to the Audit Committee on a periodic basis.

Changes in Internal Control over Financial Reporting

As described above, the Company is taking steps to remediate the material weakness noted above. Other than in connection with these remediation steps, there have been no changes in our internal control over financial reporting during the six months ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except for the additional risk factors set forth below, there have been no material changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 and our quarterly report on Form 10-Q for the six months ended June 30, 2024, as filed with the SEC on April 17, 2024 and August 19, 2024, respectively.

We may incur material expenses or delays in financings or SEC filings due to the dismissal of BF Borgers and our stock price and access to the capital markets may be affected.

As a public company, we are required to file with the SEC financial statements that are audited or reviewed, as applicable, by an independent registered public accountant. Our access to the capital markets and our ability to make timely filings with the SEC will depend on having financial statements audited or reviewed again by a new independent registered public accounting firm. In addition, because the SEC found that BF Borgers CPA PC deliberately failed to conduct audits and quarterly reviews in accordance with applicable PCAOB standards and fraudulently issued audit reports, we will not be able to rely on BF Borgers (as defined herein) to provide other information or documents that would customarily be received by us or underwriters in connection with financings or other transactions, including consents and “comfort” letters. As a result, we may encounter delays, additional expense and other difficulties in future financings. Any resulting delay in accessing or inability to access the public capital markets could be disruptive to our operations and could affect the price and liquidity of our securities. Any negative news about the proceedings against BF Borgers may also adversely affect investor confidence in companies that were previous clients of BF Borgers. All of these factors could materially and adversely affect the market price of our common stock and our ability to access the capital markets.

You are unlikely to be able to exercise effective remedies or collect judgments against BF Borgers relating to their work as our independent registered public accounting firm.

BF Borgers served as our independent registered public accounting firm from 2020 to 2023. On May 3, 2024, the SEC entered an order instituting settled administrative and cease-and-desist proceedings against BF Borgers CPA PC (“Borgers”) and its sole audit partner, Benjamin F. Borgers CPA, permanently, barring Mr. Borgers and Borgers (collectively, “BF Borgers”) from appearing or practicing before the Commission as an accountant (the “Order”). As a result of the Order, BF Borgers may no longer serve as the Company’s independent registered public accounting firm, nor can BF Borgers issue any audit reports included in Commission filings or provide consents with respect to audit reports. In light of the Order, the Audit Committee of the board of directors of the Company (the “Audit Committee”) on May 9, 2024, unanimously approved to dismiss and dismissed BF Borgers as the Company’s independent registered public accounting firm and approved the engagement of Enrome LLP to serve as the Company’s new independent registered public accounting firm. The management has also decided to redo the annual audit for the year of 2023 by the end of 2024. We have no ability to ascertain whether BF Borgers will survive or that adequate assets will be available to satisfy any claims against it. As a result, you may not be able to exercise effective remedies or collection judgements against BF Borgers.

We may be subject to fines and penalties imposed by the Chinese government for having failed to complete the filing obligations required by the Trial Administrative Measures.

On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Administrative Measures”), which took effect on March 31, 2023. Compared to the Draft Rules, the Trial Administrative Measures further clarified and emphasized several aspects, including: (i) comprehensive determination of the “indirect overseas offering and listing by Mainland China domestic companies” in compliance with the principle of “substance over form” and particularly, an issuer will be required to go through the filing procedures under the Trial Administrative Measures if the following criteria are met at the same time: a) 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent accounting year is accounted for by Mainland China domestic companies, and b) the main parts of the issuer’s business activities are conducted in Mainland China, or its main places of business are located in Mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled in Mainland China; (ii) exemptions from immediate filing requirements for issuers that a) have already been listed or registered but not yet listed in foreign securities markets, including U.S. markets, prior to the effective date of the Trial Administrative Measures, and b) are not required to re-perform the regulatory procedures with the relevant overseas regulatory authority or the overseas stock exchange, c) whose such overseas securities offering or listing shall be completed before September 30, 2023. However, such issuers shall carry out filing procedures as required if they conduct refinancing or are involved in other circumstances that require filing with the CSRC; (iii) a negative list of types of issuers banned from listing overseas, such as issuers under investigation for bribery and corruption; (iv) regulation of issuers in specific industries; (v) issuers’ compliance with national security measures and the personal data protection laws; and (vi) certain other matters such as: an issuer must file with the CSRC within three business days after it submits an application for initial public offering to competent overseas regulators; and subsequent reports shall be filed with the CSRC on material events, including change of control or voluntary or forced delisting of the issuer(s) who have completed overseas offerings and listings. Our PRC counsel advised that because our common stock currently trades in the U.S., we were not required to submit filings to the CSRC before the Offering was completed and the Offering was not conditioned on CSRC approval. Rather, within three days of the closing of the Offering, we are required to submit filings to the CSRC in accordance with the Trial Administrative Measures. According to the relevant provisions of the Trial Administrative Measures and its supporting guidelines, the Company was advised that it was required to fulfill the filing procedures with the CSRC within three days of the closing of the Offering. According to the Trial Administrative Measures, the Company has submitted the filing materials to the CSRC, but the materials were not complete due to lack of a commitment letter from the lead underwriter for the Offering, and the Company withdrew the filing from the CSRC.

On May 7, 2024, the CSRC issued the “Regulatory Rules Application Guidelines, Category 7 for Overseas Issuance and Listing: Regulatory Requirements for Domestic Enterprises Transferring from Overseas OTC Markets to Overseas Stock Exchanges for Overseas Issuance and Listing.” The CSRC stated that, according to Articles 1 and 2 of the Trial Administrative Measures, overseas issuance and listing refer to activities related to issuing and listing on overseas stock exchanges, and the listing of domestic enterprises on overseas OTC markets does not fall within the scope of filing requirements. Article 16 of the Trial Administrative Measures stipulates that “an issuer’s initial public offering or listing overseas shall be filed with the CSRC within three working days after the submission of the application documents for issuance and listing overseas”; domestic enterprises transferring to overseas stock exchanges for listing should file with the CSRC within three working days after submitting the application documents for transfer listing overseas, in accordance with the relevant requirements for the initial public offering and listing overseas. Additionally, according to the “Notice on Filing Management Arrangements for Domestic Enterprises’ Overseas Issuance and Listing,” Mainland China domestic enterprises that submitted transfer listing application documents overseas but have not been approved by overseas regulatory authorities or overseas stock exchanges by March 31, 2023, the effective date of the Trial Administrative Measures, should complete the filing procedures before the overseas listing transfer is completed.

The CSRC has determined that we have failed to comply with the filing obligations imposed by the Trial Administrative Measures. As of the date of this Quarterly Report, the Company has not received any notice of penalty from the CSRC. Management will closely monitor any notice or action from CSRC. We have engaged a PRC counsel, K&H LAW FIRM, LLP (Chengdu), to complete the required filings with the CSRC and will submit the filing materials when ready. However, given that the Trial Administrative Measures were recently promulgated, there remain substantial uncertainties as to their interpretation, application, and enforcement and there is no guarantee that we can complete our filing obligations under the Trial Administrative Measures within a reasonable time. Furthermore, if the CSRC determines that there are misrepresentation, misleading statement or material omission in the materials we submit to the CSRC, the CSRC would have the right to order rectification, issue a warning and impose a fine on us of between RMB 1 million and RMB 10 million and issuing a warning to the parties responsible for such failure, misrepresentation or material omission and impose a fine on each of such individuals ranging from RMB 500,000 to RMB 5 million. Our operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We cannot guarantee that our Repurchase Program will be fully consummated or that it will enhance long-term stockholder value. Repurchases of shares of our common stock could also increase the volatility of the trading price of our common stock and could diminish our cash reserves.

On July 2, 2024, the Board of the Company approved and authorized the Repurchase Program, pursuant to which the Company intends to repurchase up to $15 million of its common stock, from time to time, for a purchase price of not less than $1.50 per share and not more than $4 per share, in the open market or privately negotiated transactions, with Westpark Capital, Inc. (“Westpark”) as the exclusive agent for the Repurchase Program. The Repurchase Program commenced on July 1, 2024, and will terminate on the date to be determined by the Board. The Repurchase Program does not have a fixed expiration date and may be suspended or discontinued at any time. The Repurchase Program will be terminated automatically upon the date that the aggregate purchases under the Repurchase Program reach $15 million. Pursuant to the Repurchase Program, the Company is not obligated to repurchase any specific number of shares of its common stock and shall not repurchase more than 25% of the average daily volume of its stock over the previous 20 trading days. The timing, manner, price, and amount of any repurchases will be determined by us at our discretion and will depend on a variety of factors, including business, economic and market conditions, prevailing stock prices, corporate and regulatory requirements, and other considerations. We cannot guarantee that the Repurchase Program will be fully consummated or that it will enhance long-term stockholder value. The Repurchase Program could also affect the trading price of our common stock and increase volatility, and any announcement of a reduction, suspension or termination of the Repurchase Program may result in a decrease in the trading price of our common stock. In addition, repurchasing our common stock could diminish our cash and cash equivalents and marketable securities available to fund working capital, repayment of debt, capital expenditures, strategic acquisitions, investments, or business opportunities, and other general corporate purposes, which may adversely affect our result of operations and financial condition.