# Inno Holdings Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Inno Holdings Inc.](/companies/inhd.md) (CIK 1961847)
- Form: 10-Q
- Filed: 2024-05-13
- Accepted by EDGAR: May 13, 2024, 20:51 ET
- Period: 2024-03-31
- Accession: 0001493152-24-018936
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1961847/000149315224018936/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1961847/000149315224018936/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $183.2k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-10-01 to 2024-03-31 | $349.8k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $1.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-10-01 to 2024-03-31 | $1.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | −$1.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-10-01 to 2024-03-31 | −$2.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 6 months, 2023-10-01 to 2024-03-31 | $800 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | −$1.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-10-01 to 2024-03-31 | −$1.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.05 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-10-01 to 2024-03-31 | −$0.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.05 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-10-01 to 2024-03-31 | −$0.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 20,751,726 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-10-01 to 2024-03-31 | 19,672,491 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-10-01 to 2024-03-31 | −$3.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-10-01 to 2024-03-31 | $270.8k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-03-31 | $4.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $5.4m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $7.1m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $3.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $3.1m | us-gaap:Liabilities |
| Current portion of debt | at 2024-03-31 | $50.7k | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2024-03-31 | $50.0k | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2024-03-31 | $4.1m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 19,345 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth under the heading “Cautionary Note Regarding Forward-Looking Statements” in this Quarter Report on Form 10-Q.*

### Overview

We are a building technology company that primarily manufactures cold-formed-steel members and offers a full range of services required to transform raw materials into precise steel framing products and prefabricated homes. We transform raw material (coils of rolled steel of various gauges and other materials) through our proprietary technologies to cut, punch and bend the steel into members or other components. These work-in-process components are further processed into finished products which are used in a variety of building types, including residential, commercial, industrial, and infrastructure. At each stage of the process, we are adding value to the original rolled steel (and other materials) to its final assembled use by businesses or directly to customers.

Our largest commodity expense is our primary raw material — rolled steel in various gauges and widths. Like any commodity, steel is subject to supply/demand-based price fluctuations which can have an impact on the profitability of our business if prices change between the time we enter into a contract with a customer to deliver finished goods and the time the steel is purchased from the mill. We seek to mitigate our exposure to steel price fluctuations in two ways:

- Entering fixed price forward contracts with steel mills/suppliers for delivery in the future so that our bids for customer contracts have known pricing for the steel. This is particularly useful in larger projects that involve delivery of product over many months.
- Maintaining an approximately three-month inventory of our most actively used rolled steel coils (defined by width and gauge). This inventory requires an active forward-looking assessment of steel needs to meet expected demand. Maintaining inventory is a real financial exposure especially during periods of pricing volatility.

### Key Performance Indicators (“KPIs”)

In addition to the measures presented in our consolidated financial statements, our management regularly monitors certain KPIs for our business. The KPIs used by the Company include:

#### The capital turnover rate of raw-material procurement

Our business is reliant on timely delivery of raw materials. At the same time, our primary raw material (steel) is expensive to warehouse. We strive to achieve roughly 1-3 months of raw materials inventory to balance our cost of inventory against the risk of not having raw materials when needed. We do this by setting up long-term cooperative relationship with multiple local and national suppliers, including steel mills, in order to obtain a better payment cycle to secure the raw materials and to maximize the use of funds. At the same time, to match the raw-material usage of the sales order each quarter, we make quarterly purchase plans, to ensure the efficiency of capital turnover is higher.

#### The collection period of accounts receivable

Timely payments from customers are essential to a successful business. Based on our historical collectability experience, we will target strategic relationships with large-scale homebuilders and professional companies to reduce the risk associated with accounts receivable and reduce the days outstanding for accounts receivable. Eventually, we expect to achieve the goal of receiving 100% of the payment before products leave the shop.

#### Lead time

Construction requires the coordination of many contractors, subcontractors, permitting, etc. that must be done on very exacting schedules where any delays will have a ripple effect down the chain. While there are many things we cannot control, we strive to communicate with the customers at a high frequency and make the best production arrangement to minimize storage period and shorten the lead time, which is one of the most important operating indicators of INNO.

#### The growth of total operating income

We maintain internal long-term targets for both gross profit and operating income, based partly on long-term revenue growth targets and partly on execution and internal controls. Ultimately, we strive to deliver profitable long-term growth.

#### Production capacity improvement

We are committed to investing in the improvement of production capacity and production efficiency to support larger orders and to meet the goal of increasing total operating income.

### Results of Operation

The following table presents certain Consolidated statement-of-operations information and presentation of that data as a percentage of change from year to year.

### For the Three and Six Months ended March 31, 2024, and 2023

|  | Three months ended March 31, 2024 | 2023 |  | Six months ended March 31, 2024 | 2023 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $183,196 | $88,613 | 107% | $349,813 | $397,614 | -12% |
| Costs of materials and labor | 208,991 | 85,012 | 146% | 378,608 | 368,824 | 3% |
| Selling, general and administrative expenses (exclusive of items shown separately below) | 1,102,198 | 557,351 | 98% | 1,887,734 | 1,019,452 | 85% |
| Impairment loss | 23,911 | - | 100% | 23,911 | - | 100% |
| Depreciation | 22,263 | 17,764 | 25% | 43,323 | 32,783 | 32% |
| Bad debt expense | 59,935 | - | 100% | 59,935 | 400,600 | -85% |
| Operating loss | (1,234,102) | (571,514) | 116% | (2,043,698) | (1,424,045) | 44% |
| Other income (expenses) | 140,175 | (17,381) | -906% | 133,307 | (35,878) | -472% |
| Loss before income taxes | (1,093,927) | (588,895) | 86% | (1,910,391) | (1,459,923) | 31% |
| Income tax expense | - | - |  | 800 | - | 100% |
| Net loss | (1,093,927) | (588,895) | 86% | (1,911,191) | (1,459,923) | 31% |
| Non-controlling interest | (33,470) | (32,514) | 3% | (49,216) | (62,537) | -21% |
| Net loss attributable to INNO HOLDINGS INC. | $(1,060,457) | $(556,381) | 91% | $(1,861,975) | $(1,397,386) | 33% |
| Operating loss % of revenues | -674% | -645% |  | -584% | -358% |  |
| Net loss % of revenues | -597% | -665% |  | -546% | -367% |  |

#### Revenues

Revenue for the three months ended March 31, 2024 increased 107% to $183,196 in comparison to $88,613 for the three months ended March 31, 2023. The increase was due to the completion of three projects during the three months ended March 31, 2024 compared to one project during the same period in 2023. Revenue for the six months ended March 31, 2024 decreased 12% to $349,813 in comparison to $397,614 for the six months ended March 31, 2023. The decrease was primarily due to the various statuses and stages of projects. To mitigate collection issues, the Company has focused on developing relationships with larger customers. During the three and six months ended March 31, 2024, the Company has been working on obtaining permits for large projects and exploring new business opportunities with larger customers.

Our backlog as of March 31, 2024 was approximately $14,000,000 to $19,000,000. The range of backlog amount is comprised of all remaining payments related to our signed customer contracts and estimation of order adjustments. The timing of revenue recognition from these contracts is subject to variation based on each project’s permit status and construction progress. These signed contracts included an agreement, amount of $15,875,800, with Vision Opportunity Fund LP, assigned to Vision 101 partially owned by one of our minority shareholders. None of the contract amount has been delivered to Vision 101 or recognized as revenue as of March 31, 2024.

Our revenues are significantly impacted by demand for residential and commercial buildings, economic conditions including interest rates and costs of labor, materials and other variables that impact the cost of our finished goods. We cannot ensure that growth will continue, and our business may be adversely affected by negative overall economic conditions currently being experienced.

#### Costs of Materials and Labor

Costs of materials and labor include raw materials (primarily rolled steel) and direct labor in the processing of raw materials through the manufacturing process. Costs of materials and labor for the three months ended March 31, 2024, increased to $208,991 in comparison to $85,012 for the three months ended March 31, 2023. The rise in the Cost of Goods Sold (COGS), pertaining to materials and labor, is predominantly due to the increase in sales volume. Moreover, a discount granted to one of the customers, as a remedy for the impact of the deferred timeline, has led to a situation where the escalation in costs has outpaced the growth in revenue.

Costs of materials and labor for the six months ended March 31, 2024 was $378,608 compared to $368,824 for the six months ended March 31, 2023. A discount granted to one of our customers, as a remedy for a deferred timeline, has led to a situation where the increase in costs has outpaced the revenue changes.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2024, increased 98% to $1,102,198 in comparison to $557,351 for the comparable period in 2023. Selling, general and administrative expenses for the six months ended March 31, 2024, increased 85% to $1,887,734 in comparison to $1,019,452 for the comparable period in 2023. The main reason for the increase was the additional overhead costs, such as rent, payroll, insurance, consulting and professional fees, as well as marketing and promotional expenses to support our future expansion and meet the regulatory standards of a public company.

#### Bad debt expense

Bad debt expense increased by $59,935 for the three months ended March 31, 2024 compared to the same period in 2023. Bad debt expense decreased by $340,665 for the six months ended March 31, 2024 compared to the same period in 2023. We estimated the credit losses based on each customer’s financial situation, project status and the outstanding days of the accounts receivable balance. Started prior year, we strengthen our risk control of accounts receivable and reduce the days outstanding for accounts receivable by discontinuing business with smaller customers with high credit risk. Most of our current customers adhere to a 30-day payment term. For the current quarter’s transactions, we have maintained a high collection rate.

#### Operating Loss

Operating loss was $1,234,102 for the three months ended March 31, 2024, in comparison to an operating loss of $571,514 for the comparable period in 2023. The increase in operating loss was primarily attributed to the increase in COGS, selling, general and administrative expenses and bad debt expense offset by increased revenue, as discussed above.

Operating loss was $2,043,698 for the six months ended March 31,2024, in comparison to an operating loss of $ 1,424,045 for the comparable period in 2023. The increase in operating loss was primarily attributed to the lower revenue and increased expenses offset by the decrease in bad debt expense, as discussed above.

#### Other Income (Expense)

Other income for the three months ended March 31, 2024, was $140,175, in comparison to other expenses of $17,381 for the comparable period in 2023. Other income for the six months ended March 31, 2024, was $133,307, in comparison to other expenses of $35,878 for the comparable period in 2023. The increase in other income was primarily related to the recognition of supporting services provided to one of its customers and the interest earned from the bank deposit.

#### Net Loss

Net loss for the three months ended March 31, 2024 was $1,093,927, in comparison to net loss of $588,895 for the three months ended March 31, 2023. Net loss for the six months ended March 31, 2024 was $1,911,191, in comparison to a net loss of $1,459,923 for the six months ended March 31, 2023. The increase in net loss was primarily due to changes in revenue, costs and expenses as outlined above.

### Liquidity and Capital Resources

#### Sources of Liquidity

During the three and six months ended March 31, 2024 and 2023, we primarily funded our operations with cash generated from operations, private and public shares offering, as well as through borrowing under our revolving line of credit, a long term promissory note, and related parties. We had cash of $4,045,442 as of March 31, 2024 compared to $4,898 of cash as of September 30, 2023. The cash increase was primarily due to the proceeds from the initial public offering closed in December 2023 and offset by the cash usage in operating and investing activities during the periods ended March 31, 2024.

The Company has participated in several private-placement offerings. On December 3, 2022, we closed on a private-placement offering pursuant to which we sold to an accredited investor an aggregate of $500,000 in common stock, at a purchase price of $3.50 per share. On March 13, 2023, we closed on a private-placement offering pursuant to which we sold to an accredited investor an aggregate of $100,000 in common stock, at a purchase price of $3.70 per share. On March 29, 2023, we closed on a private-placement offering pursuant to which we sold to an accredited investor an aggregate of $300,000 in common stock, at a purchase price of $3.80 per share. The offerings were completed pursuant to an exemption from registration under Rule 506(b) of the Securities Act of 1933, as amended.

On December 18, 2023, the Company successfully closed the initial public offering with net proceeds of $8 million.

We believe the cash and cash equivalents on hand as of March 31, 2024 of $4,045,442 will be sufficient to fund our operations and capital expenditure requirements for the next twelve months from the date the consolidated financial statements are issued.

#### Working Capital

As of March 31, 2024 and September 30, 2023, our working capital (deficit) was $2,400,327 and $(2,913,827), respectively. The historical seasonality in our business during the year can cause cash and cash equivalents, inventory, and accounts payable to fluctuate, resulting in changes in our working capital.

#### Cash Flows

#### Operating Activities

Net cash used in operating activities for the six months ended March 31, 2024 was $3,128,450 compared to $673,923 of net cash used in operating activities for the six months ended March 31,2023. The increase of net cash usage in operating activities was mainly due to a $623,774 increase of loss with non-cash reconciling items adjustment and a $1,830,753 increase of working capital outflow.

For the six months ended March 31, 2024, net cash used in operating activities was $3,128,450, primarily driven by the net loss of $1,911,191, partially offset by non-cash items of $317,115 and working capital used cash of $1,534,374, which was primarily driven by a $845,874 increase of prepayments and other current assets, including prepaid insurance, advance to suppliers, prepaid marketing expenses as well as escrow deposits for building purchase, and a $680,739 decrease in accounts payable, unearned revenue and other current liabilities.

For the six months ended March 31, 2023, net cash used in operating activities was $673,923, primarily driven by the net loss of $1,459,923, partially offset by non-cash items of $489,621, which mainly included bad debt expense of $400,600. Working capital provided cash of $296,379, which was primarily driven by a $327,438 increase in accounts payable, unearned revenue and other current liabilities, a $468,895 decrease in account receivable, a $118,662 decrease of prepayments and other current assets, and partially offset by a $402,423 increase in inventories and a $216,193 increase in deferred offering costs.

#### Investing Activities

For the six months ended March 31, 2024 and 2023, net cash used in investing activities was the result of additions to property and equipment of $270,798 and $226,899, respectively, which are mainly related to the additions of machinery, tools, motor vehicles, and leasehold improvements.

#### Financing Activities

Net cash provided by financing activities was $7,438,223 and $1,015,487, respectively, for the six months ended March 31, 2024 and 2023.

For the six months ended March 31, 2024, net cash provided by financing activities was primarily due to the $8,450,000 net cash from the initial public offering, $91,000 proceeds from related parties and offset by $740,000 payment of short-term loans and $325,372 repayment to related parties.

For the six months ended March 31, 2023, net cash provided by financing activities was primarily due to the $900,000 proceeds from stock issuance and $134,767 proceeds from related parties.

### Critical Accounting Policies and Estimate

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 2 — Basis of Presentation and Summary of significant accounting policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed Form 10-K, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recently filed Form 10-K, include the discussion of estimates used for revenue recognition, inventory valuation, going concern assessment, and our provision for income taxes. Such accounting estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported.

#### New Accounting Standards

From time to time, the FASB or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2 — Basis of Presentation and Summary of significant accounting policies, “Recently issued but not yet adopted accounting pronouncements”, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.

## Controls and procedures

As filed, 3,649 characters.

### Disclosure Controls and Procedures

An evaluation was performed under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of March 31, 2024, our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms due to material weaknesses in our internal controls described below.

- Lack of sufficient personnel commensurate with our accounting and reporting requirements and insufficient segregation of duties within accounting functions.
- Lack of adequate policies and procedures in internal control function to ensure that proper control and procedures have been designed and implemented over key business cycles.

We plan to hire additional qualified personnel with relevant experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework. However, we cannot assure you that we will remediate our material weaknesses in a timely manner.

### Inherent Limitations Over Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our control systems are designed to provide such reasonable assurance of achieving their objectives. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

### Changes in Internal Control over Financial Reporting

There have not been any changes in our internal controls over financial reporting during the period ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### PART II

### OTHER INFORMATION

## Risk factors

As filed, 4,507 characters.

***Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock, which could negatively impact the market price and liquidity of our common stock and our ability to access the capital markets.***

On April 12, 2024, we received a letter from The Nasdaq notifying us that the minimum bid price per share for our common stock fell below $1.00 for a period of 30 consecutive business days. Therefore, the Company did not meet the minimum bid price requirement set forth in the Nasdaq Listing Rules.

The letter also states that pursuant to Nasdaq Listing Rules 5810(c)(3)(A), we will be provided 180 calendar days to regain compliance with the minimum bid price requirement, or until October 9, 2024.

We can regain compliance if, at any time during the Tolling Period or such 180-day period, the closing bid price of our common stock is at least $1.00 for a minimum period of 10 consecutive business days. If by October 9, 2024, we do not regain compliance with the Nasdaq Listing Rules, we may be eligible for additional time to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A)(ii). We would also need to provide written notice to Nasdaq of our intention to cure the minimum bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. As part of its review process, the Nasdaq staff will make a determination of whether it believes we will be able to cure this deficiency. Should the Nasdaq staff conclude that we will not be able to cure the deficiency, or should we determine not to submit a transfer application or make the required representation, Nasdaq will provide notice that our shares of common stock will be subject to delisting.

If we do not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that our shares of common stock will be subject to delisting from the Nasdaq Capital Market. At such time, we may appeal the delisting determination to a hearings panel.

We intend to monitor our common stock closing bid price between now and October 9, 2024 and will consider available options to resolve the Company’s noncompliance with the minimum bid price requirement, as may be necessary. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.

***Our common stock may be subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to their customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which could make it more difficult for our stockholders to sell their securities.***

Rule 3a51-1 of the Exchange Act establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share, subject to a limited number of exceptions, including for having securities registered on certain national securities exchanges. If our common stock were delisted from the Nasdaq, market liquidity for our common stock could be severely and adversely affected.

For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:

- the basis on which the broker or dealer made the suitability determination; and
- that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Filed May 13, 2024.
Source: SEC EDGAR, the filing index for accession 0001493152-24-018936. Last ingested by Listed: Oct 24, 2026, 15:16 ET. No prices; not investment advice.