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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
 
FORM 
10-Q
 
 
 
(Mark One)
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2024
 
 
 
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
 
 
 
For the transition period from to
 
 
 
Commission File No. 001-41816
 
 
NORTHANN CORP.
(Exact name of registrant as specified in its charter)
 
Nevada
 
88-1513509
(State or other jurisdiction of
 
incorporation or organization)
 
(I.R.S. Employer
 
Identification No.)
 
c/o Northann Distribution Center Inc.
 
9820 Dino Drive, Suite 110
 
Elk Grove,
CA
95624
 
95624
(Address of Principal Executive Offices)
 
(Zip Code)
 
(916) 573 3803
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which
 
registered
Common Stock, $0.001 par value
 
NCL
 
NYSE American LLC
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
 No 
 
 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes 
No
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes 
 No
 
 
 
As of May
20
, 2024, there were 23,240,000 shares of common stock of the Registrant, par value $0.001 per share, issued and outstanding.
 
 
 
 
  
 
 
 
 
 
 
Northann Corp.
 
Quarterly Report on Form 10-Q
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 





 

 





 

 





 

 





 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
i
 
 
PART I – FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
 
 
NORTHANN CORP.
 
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In U.S. dollars)
 
 
 
As of
March
31,
 
 
 
 
 
 
As of
December 31,
 
 
 
 
202
4
 
 
202
3
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
Cash
 
$
590,169
 
 
$
1,101,443
 
Restricted cash
 
 
3,765
 
 
 
3,771
 
Accounts receivable, net
 
 
2,535,962
 
 
 
2,615,458
 
Inventory, net
 
 
2,843,811
 
 
 
2,645,488
 
Prepayments
 
 
317,267
 
 
 
311,402
 
Other receivables and other current assets
 
 
47,257
 
 
 
127,313
 
Total current assets
 
 
6,338,231
 
 
 
6,804,875
 
 
 
 
 
 
 
 
 
 
NON-CURRENT ASSETS
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 
 
4,549,995
 
 
 
4,724,105
 
Construction in progress
 
 
1,232,580
 
 
 
962,338
 
Land use rights, net
 
 
1,023,235
 
 
 
1,030,982
 
Operating lease right-of-use assets, net
 
 
79,673
 
 
 
87,380
 
Security deposits
 
 
9,030
 
 
 
9,030
 
Total non-current assets
 
 
6,894,513
 
 
 
6,813,835
 
 
 
 
 
 
 
 
 
 
TOTAL ASSETS
 
$
13,232,744
 
 
$
13,618,710
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
 
Bank borrowings - current
 
 
4,494,627
 
 
 
5,689,721
 
Operating lease liabilities, current
 
 
31,807
 
 
 
31,413
 
Accounts and other payables and accruals
 
 
4,280,334
 
 
 
4,538,322
 
Taxes payable
 
 
510,968
 
 
 
608,679
 
Unearned revenue
 
 
1,573,969
 
 
 
1,084,484
 
Amounts due to related parties
 
 
1,386,943
 
 
 
302,943
 
Obligation under secured borrowing arrangement
 
 
71,169
 
 
 
599,664
 
Total current liabilities
 
 
12,349,817
 
 
 
12,855,226
 
 
 
 
 
 
 
 
 
 
Bank borrowings – non-current
 
 
122,712
 
 
 
124,905
 
Operating lease liabilities, – non-current
 
 
47,866
 
 
 
55,967
 
Total non-current liabilities
 
 
170,578
 
 
 
180,872
 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES
 
$
12,520,395
 
 
$
13,036,098
 
 
 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Preferred stock – Series A, $0.001 par value, 100,000,000 shares authorized, 10,000,000 shares issued and outstanding as of March 31, 202
4
and December 31, 202
3
 
 
5,000
 
 
 
5,000
 
Common stock, $0.001 par value, 400,000,000 shares authorized, 40,000,000 shares issued and outstanding as of March 31, 202
4
and December 31, 202
3
 
 
21,380
 
 
 
21,380
 
Subscription receivable
 
 
(25,000
)
 
 
(25,000
)
Additional paid-in capital
 
 
6,671,016
 
 
 
6,671,016
 
Retained earnings
 
 
(5,253,908
)
 
 
 
 
(5,313,943
)
Accumulated other comprehensive loss
 
 
(706,139
)
 
 
(775,841
)
Total stockholders’ e
q
uity
 
 
712,349
 
 
 
582,612
 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
 
$
13,232,744
 
 
$
13,618,710
 
      
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-1
 
 
NORTHANN CORP. 
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In U.S. dollars)
 
 
 
Three Months Ended
March 31,
 
 
 
 
202
4
 
 
202
3
 
 
 
(Unaudited)
 
 
(Unaudited)
 
 
 
 
 
 
 
 
REVENUES
 
$
4,595,531
 
 
$
2,734,933
 
 
 
 
 
 
 
 
 
 
COST OF REVENUES
 
 
3,051,541
 
 
 
1,484,991
 
 
 
 
 
 
 
 
 
 
GROSS PROFIT
 
 
1,543,990
 
 
 
1,249,942
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
Selling expenses
 
 
218,375
 
 
 
198,491
 
General and administrative expenses
 
 
485,037
 
 
 
355,127
 
Research and development expenses
 
 
512,597
 
 
 
300,212
 
 
 
 
 
 
 
 
 
 
Total operating expenses
 
 
1,216,009
 
 
 
853,830
 
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
 
 
327,981
 
 
 
396,112
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest expense
 
 
(267,946
)
 
 
(87,737
)
Amortization of debt discounts
 
 
 
-
 
 
 
(123,288
)
Other income
 
 
 
-
 
 
 
159
 
Exchange loss
 
 
 
-
 
 
 
5,600
 
Total other (expenses)
 
 
(267,946
)
 
 
(205,266
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE TAXES
 
 
60,035
 
 
 
190,846
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
-
 
 
 
(5,380
)
 
 
 
 
 
 
 
 
 
NET INCOME
 
 
60,035
 
 
 
185,466
 
 
 
 
 
 
 
 
 
 
Other comprehensive income :
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
69,702
 
 
 
373,736
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
129,737
 
 
 
559,202
 
 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share
 
 
0.0028
 
 
$
0.0100
 
 
 
 
 
 
 
 
 
 
Weighted average number of shares of common stock outstanding – basic
 
 
21,380,000
 
 
 
20,000,000
 
Weighted average number of shares of common stock outstanding – diluted
 
 
21,380,000
 
 
 
20,000,000
 
  
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-2
 
 
NORTHANN CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
 
EQUITY
(Unaudited) 
(In U.S. dollars)
 
 
 
Preferred Stock –

Series A
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of shares
 
 
 
 
Amount
 
 
Number
of shares
 
 
 
 
Amount
 
 
Subscription
receivable
 
 
 
 
Additional
paid in
capital
 
 
 
 
 
 
Retained
earnings
 
 
 
 
Accumulated
other
comprehensive
loss
 
 
 
 
 
 
Total
 
Balance, December 31, 202
2
 
 
5,000,000
 
 
$
5,000
 
 
 
20,000,000
 
 
$
20,000
 
 
$
(25,000
)
 
$
925,000
 
 
$
1,818,630
 
 
$
(769,891
)
 
$
1,973,739
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
185,466
 
 
 
 
 
 
 
185,466
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
373
,
736
 
 
$
373
,
736
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 202
3
 
 
5,000,000
 
 
$
5,000
 
 
 
20,000,000
 
 
$
20,000
 
 
$
-25,000
 
 
$
925,000
 
 
$
2,004,096
 
 
$
(396,155
)
 
 
$
2,532,941
 
 
 
 
 
Preferred Stock –
Series A
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of shares
 
 
 
 
Amount
 
 
Number
of shares
 
 
 
 
Amount
 
 
Subscription
receivable
 
 
 
 
Additional
paid in
capital
 
 
 
 
 
 
Retained
earnings
 
 
 
 
Accumulated
other
comprehensive
loss
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 202
3
 
 
5,000,000
 
 
$
5,000
 
 
 
21,380,000
 
 
$
21,380
 
 
$
(25,000
)
 
$
6,671,016
 
 
$
(5,313,943
)
 
$
(775,841
)
 
$
582,612
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
60,035
 
 
 
-
 
 
 
60,035
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
69,702
 
 
 
69,702
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 202
4
 
 
5,000,000
 
 
$
5,000
 
 
 
21,380,000
 
 
$
21,380
 
 
$
(25,000
)
 
$
6,671,016
 
 
$
(5,253,908
)
 
$
(706,139
)
 
$
712,349
 
     
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-3
 
 
NORTHANN CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In U.S. dollars)
 
 
 
Three Months Ended March 31,
 
 
 
 
 
202
4
 
 
202
3
 
 
 
(Unaudited)
 
 
(Unaudited)
 
Cash flows from operating activities
 
 
 
 
 
 
 
 
Net income
 
$
60,035
 
 
$
185,466
 
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
 
 
13,891
 
 
 
 
-
 
Depreciation and amortization
 
 
134,823
 
 
 
239,017
 
Amortization of debt discounts
 
 
 
-
 
 
 
123,288
 
Changes in assets and liabilities
 
 
 
 
 
 
 
 
Accounts receivable
 
 
79,496
 
 
 
478,162
 
Other receivables
 
 
80,056
 
 
 
 
 
73,928
 
Prepayments
 
 
(5,865
)
 
 
(64,164
)
Inventory
 
 
(198,323
)
 
 
(1,233,379
)
Prepaid expenses
 
 
-
 
 
 
-
 
Right of use assets
 
 
7,707
 
 
 
6,769
 
Deferred tax asset
 
 
-
 
 
 
-
 
Accounts payable
 
 
(206,537
)
 
 
(775,741
)
Accruals and other payables
 
 
(25,608
)
 
 
146,435
 
Unearned revenue
 
 
489,485
 
 
 
4
 
Payroll payable
 
 
(29,909
)
 
 
(4,155
)
Taxes payable
 
 
(97,711
)
 
 
(64,249
)
Accrued interest
 
 
4,066
 
 
 
-
 
Operating leases
 
 
(7,707
)
 
 
(6,769
)
Other assets
 
 
-
 
 
 
(52
)
Net cash provided or
(
used in
)
 operating activities
 
 
297,897
 
 
 
(895,440
)
 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
 
(Payments for) proceeds from disposal
 
 
 
-
 
 
 
(130,999
)
Payments for equipment
 
 
 
-
 
 
 
(15,260
)
(
Payments for
)
or transfer from construction
 
 
(270,242
)
 
 
(13,139
)
Net cash used in investing activities
 
 
(270,242
)
 
 
(159,398
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
 
Payment of  Bank Loan
 
 
(1,197,287
)
 
 
(28,394
)
Payment of secured borrowing arrangement
 
 
(528,495
)
 
 
 
-
 
Amounts received from or related party
 
 
1,084,000
 
 
 
550,337
 
Net cash
(used in)
provided by financing activities
 
 
(641,782
)
 
 
521,943
 
 
 
 
 
 
 
 
 
 
Effect of exchange rates on cash
 
 
102,847
 
 
 
373,736
 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
 
(511,280
)
 
 
(159,159
)
 
 
 
 
 
 
 
 
 
Cash at beginning of year
 
 
1,105,214
 
 
 
251,100
 
 
 
 
 
 
 
 
 
 
Cash at end of year
 
$
593,934
 
 
$
91,941
 
 
 
 
 
 
 
 
 
 
Supplemental of cash flow information
 
 
 
 
 
 
 
 
Cash paid for interest
 
$
339,821
 
 
$
70,244
 
Cash paid for income taxes
 
$
-
 
 
$
5,380
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 202
4
(UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31 202
3
(In U.S. dollars)
 
1.
ORGANIZATION AND BUSINESS
 
The Company commenced operations in August 2013 with the establishment of Northann Building Solutions LLC. (“NBS”) in Delaware. In December 2013, Northann (Changzhou) Construction Products Ltd (“NCP”) was established in China. All of its products were manufactured through NCP.
 
In March 2014, Benchwich Construction Products Ltd (“Benchwick”) was established in Hong Kong. All wholesales to distributors are conducted through Benchwick.
 
In April 2014, Changzhou Macro Merit International Trading Co., Ltd. (“MARCO”) was established in China. All the import/export of our products are conducted through MARCO.
 
In February 2016, Northann Distribution Center Inc. (“NDC”) was established in California. NDC is a distribution center in the United States and maintains a small inventory for retail sales.
 
In September 2017, Changzhou Ringold International Trading Co., Ltd. (“Ringold”) was established in China. All of the raw material are procured from third parties through Ringold.
 
In September 2018, Crazy Industry (Changzhou) Industry Technology Co., Ltd. (“Crazy Industry”) was established in China. Crazy Industry is the research and development hub.
 
In June 2020, Dotfloor Inc. (“Dotfloor”) was established in California. Dotfloor operates dotfloor.com, the online store that offers our vinyl flooring products to retail customers in the United States.
 
In March 2022, Northann Corp. (“Northann”), the current ultimate holding company, was incorporated in Nevada as part of the restructuring transactions in contemplation of our initial public offering. In connection with its incorporation, in April 2022, we completed a share swap transaction and issued common stock and Series A Preferred Stock of Northann to the then existing shareholders of NBS, based on their then respective equity interests held in NBS. NBS then became our wholly owned subsidiary.  In accordance to ASC 805-50-30-5 and ASC 805-50-45-1 through 45-5, the series of restructuring transactions have been accounted for as transactions between entities under common control; accordingly, the Company’s historical capital structure has been retroactively restated to the first period presented.
 
On October 23, 2023, the Company consummated the initial public offering (the “IPO”) of 1,200,000 shares of common stock, par value $0.001 per share at an offering price of $5.00 per share. On October 25, 2023, the underwriters of the IPO fully exercised the over-allotment option granted by the Company and purchased additional 180,000 shares of Common Stock at $5.00 per share. The closing of the Over-Allotment Option took place on October 26, 2023.
 
Going Concern
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of
March
31, 202
4
, the Company had a working capital deficit of $
6,011,586
and net cash
provided by
operating activities of $
93,248
for the
three months
ended
March
31, 202
4
. The Company may not have adequate liquidity to remain solvent and settle its obligations when payment become due; these factors gave rise to substantial doubt that the Company would continue as a going concern. Management is closely monitoring its financial position, especially its working capital and cash position, as well as its gross profit margins where its positive results of operations will allow the Company to continue as going concern. The company’s foremost plan is to
boost revenue and improve profitability
. These financial statements do not include any adjustments that might result from the outcome of this uncertainly.
 
 
F-5
 
 
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and include the assets, liabilities, revenues, expenses and cash flows of all subsidiaries. All significant inter-company transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.
 
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
 
Use of Estimates
 
The preparation of these consolidation financial statements requires management of the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an on-going basis, the Company evaluates its estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Identified below are the accounting policies that reflect the Company’s most significant estimates and judgments, and those that the Company believes are the most critical to fully understanding and evaluating its consolidated financial statements.
 
Basis of Consolidation
 
The consolidated financial statements include the financial statements of the Company.
 
Revenue Recognition
 
The Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation.
 
Revenue for sales of products which are primarily comprised of hardwood floors and three-dimensional printed flooring are recognized at the time of delivery of the products set forth in contracts with customers. At the time of delivery, physical and legal control of the asset is passed from the Company to its customer, at which time the Company believes it has satisfied the single performance obligation to complete a sales transaction in order to recognize revenue. The Company’s contracts do not allow for returns, refunds, or warranties; however, it is customary in the industry to manufacturers to ship a small portion of extra product to allow for product quality issues. Also, as matter of good business practice, under very specific situations, the Company has historically agreed to provide minor discounts to customers who made complaints on products purchased. The Company has recorded these costs as period expenses when incurred as the Company is not able to reliably estimate such future expenses.
 
Revenues are recognized when control of the promised goods or services is transferred to our customers, which may occur at a point in time or over time depending on the terms and conditions of the agreement, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
 
 
F-6
 
 
Practical expedients and exemption
 
The Company has not occurred any costs to obtain contracts and does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
 
The Company typically enters into agreements with its customers where its set forth the product to be sold, the price, payment terms, and any antecedent terms such as shipping and delivery specifications; these terms and conditions are most typically specified in purchase order issued by its customers to the Company. The Company typically recognizes revenue at point in time, which is when physical possession and legal title are transferred to the customer, this may be a shipping port or a specified destination; at this point the Company reasonably expect to paid for the product, or in the event where it was paid advance, the Company’s performance obligations have been satisfied and those funds are considered earned by the Company. If the Company sells products on account to customers, they are typically paid within 90 days. Any funds received in advance for the products yet to be transferred to its customer are contract liabilities that are recorded as unearned revenue on the Company’s consolidated balance sheets. $
1,084,484
and $
291
were recognized as revenue from unearned revenue during the
three months
ended
March
31, 202
4
and 202
3
.
 
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
 
Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.
 
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted by the U.S. government which included a wide range of tax reform affecting businesses including the corporate tax rates, international tax provisions, tax credits and deduction with majority of the tax provision effective after December 31, 2017. Certain activities conducted in foreign jurisdictions may result in the imposition of U.S. corporate income taxes on the Company when its subsidiaries, controlled foreign corporations (“CFCs”), generate income that is subject to Subpart F or GILTI under the U.S. Internal Revenue Code beginning after December 31, 2017.
 
The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on 27 March 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carry backs for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of
March 31, 2024 and
December 31, 2023 due to the recent enactment.
 
 
F-7
 
 
The Company accounts for an unrecognized tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the tax authorities. The Company considers and estimates interest and penalties related to the gross unrecognized tax benefits and includes as part of its income tax provision based on the applicable income tax regulations.
 
The Company did not accrue any liability, interest or penalties related to uncertain tax positions in the provision for income taxes line of the consolidated statements of operations for the
three months
ended
March
31, 202
4
. The Company had no uncertain tax position for the
three months
ended
March
31, 202
4
and
March
31, 202
3
.
 
Foreign Currency and Foreign Currency Translation
 
The functional currency of the Company is the Chinese Yuan (“RMB”), as their functional currencies. An entity’s functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
 
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of comprehensive loss.
 
The consolidated financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the consolidated balance sheets.
 
Translation of amounts from RMB and HKD into U.S. dollars has been made at the following exchange rates:
 
Balance sheet items, except for equity accounts
 
 
 
 
March 31, 202
4
 
RMB
7.0950
to $1
 
HKD
7.8259
to $1
March 31, 202
3
 
RMB6.8717 to $1
 
HKD7.8497 to $1
 
 
 
 
 
Income statement and cash flows items
 
 
 
 
For the three months ended March 31, 202
4
 
RMB
7.1028
to $1
 
HKD
7.8199
to $1
For the three months ended March 31, 202
3
 
RMB6.8476 to $1
 
HKD7.8389 to $1
 
 
F-8
 
 
 
Cash
 
Cash consist of cash on hand and at banks and highly liquid investments, which are unrestricted from withdrawal or use, and which have original maturities of three months or less when purchased.
 
Accounts Receivable,
N
et
 
Accounts receivable is stated at the historical carrying amount net of allowance for doubtful accounts. The Company determines the allowance for doubtful accounts on an individual basis taking into consideration various factors including but not limited to historical collection experience and creditworthiness of the debtors as well as the age of the individual receivables balance.
 
Additionally, the Company would make specific bad debt provisions based on any specific knowledge the Company has acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require the Company to use judgment in assessing its collectability.
 
There was no allowance for doubtful accounts recorded as of
March 31, 2024 and
December 31, 2023.
 
Long-Lived Assets
 
Long-lived assets consist primarily of equipment and intangible assets.
 
Equipment
 
Equipment is recorded at cost less accumulated depreciation and accumulated impairment. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
 
 
 
Estimated useful lives (years)
 
Office and computer equipment
 
 
3-5
 
Manufacturing equipment
 
 
10-20
 
 
Expenditure for maintenance and repairs is expensed as incurred.
 
The gain or loss on the disposal of equipment is the difference between the net sales proceeds and the lower of the carrying value or fair value less cost to sell the relevant assets and is recognized in general and administrative expenses in the consolidated statements of comprehensive loss.
 
Land Use Rights,
N
et
 
Land use rights are a form of intangible assets in the PRC. They are recorded at cost less accumulated amortization with no residual value. Amortization of land use rights are computed using the straight-line method over their estimated useful lives.
 
The estimated useful lives of the Company’s land use rights are as listed below:
 
 
 
Estimated useful lives (years)
 
Land use right
 
 
50
 
 
 
F-9
 
 
Impairment of Long-lived Assets
 
In accordance with ASC 360-10-35, the Company reviews the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, the Company measures any impairment of long-lived assets using the projected discounted cash flow method at the asset group level. The estimation of future cash flows requires significant management judgment based on the Company’s historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in the Company’s business model is determined by its management. An impairment loss would be recorded if the Company determined that the carrying value of long-lived assets may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying values of the assets exceed the fair value of the assets. No impairment has been recorded by the Company
March 31, 2024 and
December 31, 2023.
 
Net earnings per share of common stock
 
The Company has adopted ASC Topic 260, “Earnings per Share,” (“EPS”) which requires presentation of basic EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation. In the accompanying consolidation financial statements, basic earnings (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
 
 
 
 
March 31,
 
 
 
202
4
 
 
202
3
 
 
 
(Unaudited)
 
Net income
 
$
60,035
 
 
$
185,466
 
 
 
 
 
 
 
 
 
 
Weighted average number of shares of common stock outstanding - basic
 
 
21,380,000
*
 
 
20,000,000
 
 
 
 
 
 
 
 
 
Add: potentially dilutive effect of shares issuable upon conversion of notes
 
 
 
 
 
 
 
 
Add: potentially dilutive effect of shares issuable upon exercise of warrants
 
 
 
 
 
 
-
 
 
 
 
 
 
 
 
 
 
Weighted average number of shares of common stock outstanding - diluted
 
 
21,380,000
*
 
 
20,000,000
*
 
 
 
 
 
 
 
 
 
Basic and diluted (loss) earnings per share
 
$
0.0028
 
$
0.0100
*
 
* Retrospectively restated for the effect of 2-for-1 reverse stock split. (Note 18)
 
Segments
 
The Company evaluates a reporting unit by first identifying its operating segments, and then evaluates each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meets the definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments are economically similar and, if so, the operating segments are aggregated. The Company has only one major reportable segment in the periods presented. The Company’s chief operation decision maker is the Company’s Chief Executive Officer.
 
Shipping and Handling Costs
 
Outbound shipping and handling costs are expenses as incurred and charged to the selling expense. Inbound shipping and freight are charged for raw material and components are accounted for as cost of revenues.
 
 
F-10
 
 
Fair Value of Financial Instruments
 
U.S. GAAP establishes a three-tier hierarchy to prioritize the inputs used in the valuation methodologies in measuring the fair value of financial instruments. This hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three-tier fair value hierarchy is:
 
Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
Level 2 – include other inputs that are directly or indirectly observable in the market place.
 
Level 3 – unobservable inputs which are supported by little or no market activity.
 
The carrying value of the Company’s financial instruments, including cash, accounts and other receivables, other current assets, accounts and other payables, and other short-term liabilities approximate their fair value due to their short maturities.
 
In accordance with ASC 825, for investments in financial instruments with a variable interest rate indexed to performance of underlying assets, the Company elected the fair value method at the date of initial recognition and carried these investments at fair value. Changes in the fair value are reflected in the accompanying consolidated statements of operations and comprehensive loss as other income (expense). To estimate fair value, the Company refers to the quoted rate of return provided by banks at the end of each period using the discounted cash flow method. The Company classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.
 
As
of March 31, 2024 and
December 31, 2023, the Company had no investments in financial instruments.
 
Leases
 
In February 2016, the FASB issued ASU 2016-12, Leases (ASC Topic 842), which amends the leases requirements in ASC Topic 840, Leases. Under the new lease accounting standard, a lessee will be required to recognize a right-of-use asset and lease liability for most leases on the balance sheet. The new standard also modifies the classification criteria and accounting for sales-type and direct financing leases, and enhances the disclosure requirements. Leases will continue to be classified as either finance or operating leases.
 
The Company adopted ASC Topic 842 using the modified retrospective transition method effective January 1, 2019. There was no cumulative effect of initially applying ASC Topic 842 that required an adjustment to the opening retained earnings on the adoption date nor revision of the balances in comparative periods. As a result of the adoption, the Company recognized a lease liability and right-of-use asset for each of the existing lease arrangement. The adoption of the new lease standard does not have a material impact on the consolidated income statements or the consolidated statements of cash flows.
 
The Company determines if an arrangement is a lease at inception. The lease payments under the lease arrangements are fixed. Non-lease components include payments for building management, utilities and property tax. It separates the non-lease components from the lease components to which they relate.
 
Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate, because the interest rate implicit in the leases is not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company generally uses the base, non-cancelable, lease term when determining the lease assets and liabilities.
 
 
F-11
 
 
Recent Accounting Pronouncements
 
Recently Adopted Accounting Standards
 
On January 1, 2020, the Company adopted ASU 2016-02, Leases, using the modified retrospective method which allows for the application of the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these audited consolidated financial statements. As permitted by the guidance, the Company elected to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date and did not reassess contracts entered into prior to the adoption date for the existence of a lease. The Company also did not recognize ROU assets and lease liabilities for short-term leases, which are leases in existence as of the adoption date with an original term of twelve months or less.
 
In August 2020, the FASB issued ASU No.2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The Company adopted ASU 2020-06 on January 1, 2023.
 
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments
- Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023. The Company adopted ASU 2016-13 on January 1, 2023.
 
Accounting Pronouncements Issued But Not Yet Adopted
 
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides optional expedients and exceptions for applying U.S. GAAP on contract modifications and hedge accounting to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. These optional expedients and exceptions provided in ASU No. 2020-04 are effective for the Company as of March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”), which deferred the application dates of Topic 848 to December 31, 2024. The Company currently does not have any financial instrument that reference to LIBOR and does not anticipate the adoption will have a material impact to the Company’s
consolidated financial statements.
 
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment's profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. This ASU will likely result in
additional required disclosures when adopted. The Company is currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31, 2024.
 
 
F-12
 
 
In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. The Company has evaluated this ASU and expects to add additional disclosures to the consolidated financial statements,
 
once adopted.
 
Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the consolidated financial position, statements of operations and cash flows.
  
3.
RESTRICTED CASH
 
Restricted cash consist of the following:
 
 
 
March
31,
202
4
 
 
 
 
December 31,
202
3
 
 
Deposit for Bank acceptance bill
 
$
3,765
 
 
$
3,771
 
 
 
 
 
 
 
 
 
 
Total
 
$
3,765
 
 
$
3,771
 
 
4.
ACCOUNTS RECEIVABLE, NET
 
Accounts receivable consist of the following:
 
 
 
March
31,
202
4
 
 
 
 
December 31,
202
3
 
 
Gross accounts receivable
 
$
2,535,962
 
 
$
2,615,458
 
Less: allowance for doubtful accounts
 
 
-
 
 
 
-
 
 
 
$
2,535,962
 
 
$
2,615,458
 
 
There was no allowance for doubtful accounts recorded as of
March 31, 2024 and
December 31, 2023.
 
5.
OTHER RECEIVABLES
 
Other receivables consist of the following:
 
 
 
March 31,

2024

 
 
 
 
December 31,
202
3
 
 
 
 
 
 
 
 
 
Deposit and other assets
 
 
47,258
 
 
 
127,313
 
Total
 
$
47,258
 
 
$
127,313
 
 
6.
INVENTORY, NET
 
Inventories, net, consist of the following:
 
 
 
March
31,
202
4
 
 
 
 
December 31,
202
3
 
 
Raw materials and components
 
$
1,642,965
 
 
$
1,654,771
 
Finished goods
 
 
1,200,846
 
 
 
990,717
 
Total
 
 
2,843,811
 
 
 
2,645,488
 
less: Impairment
 
 
-
 
 
 
-
 
Inventories, net
 
$
2,843,811
 
 
$
2,645,488
 
 
 
F-13
 
 
7.
EQUIPMENT, NET
 
Equipment, net consist of the following:
 
 
 
March
31,
202
4
 
 
 
 
December 31,
202
3
 
 
 
 
 
 
 
 
 
Manufacturing equipment
 
$
8,743,884
 
 
$
8,790,918
 
Office equipment
 
 
319,624
 
 
 
319,624
 
less: Accumulated depreciation
 
 
4,513,513
 
 
 
4,386,437
 
Total
 
$
4,549,995
 
 
$
4,724,105
 
 
Depreciation expenses charged to the consolidated statements of operations for the years ended
March 31, 2024 and
December 31, 2023 were $657,556 and $650,103, respectively.
 
8.
LAND USE RIGHTS, NET
 
 
 
March
31,
202
4
 
 
 
 
December 31,
202
3
 
 
 
 
 
 
 
 
 
Land use right
 
$
1,143,382
 
 
$
1,143,382
 
 
 
 
 
 
 
 
 
 
less: Accumulated amortization
 
 
120,147
 
 
 
112,400
 
 
 
$
1,023,235
 
 
$
1,030,982
 
 
The Company has pledged its land use rights at No. 199, Newtag, Wujin District, Changzhou, Jiangsu Province, China, 213000 to Industrial and Commercial Bank of China Limited as a collateral for securing its loans.
 
9.
BANK BORROWINGS
 
Current
 
Short-term loans as of
March 31, 2024 and
December 31, 2023
represents bank borrowings of $
4,087,385
and $4,832,479, respectively obtained from financial institutions in the PRC. The short-term bank borrowings were secured by land use right. The weighted average interest rate for the short-term loans for the
three months ended March 31, 2024 and 2023
was approximately
 
4.71
% and
5.07
%, respectively.
 
Bank
 
Loan period
 
 
Interest
rate
 
 
Balance at
March
31,
202
4
 
 
Balance at
December 31,
202
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrial and Commercial Bank of China
 
October 24, 2022 - July 17, 2024
 
 
 
4.35
%
 
$
1,409,443
 
 
$
1,411,891
 
Industrial and Commercial Bank of China
 
October 26, 2022 - August 17, 2024
 
 
 
4.35
%
 
 
1,409,443
 
 
 
1,411,891
 
Bank of Communications
 
January 28, 2022 - January 26, 2025
 
 
 
4.35
%
 
 
-
 
 
 
488,514
 
Bank of Communications
 
January 28, 2022 - January 26, 2025
 
 
 
4.35
%
 
 
-
 
 
 
249,481
 
Jiangnan Rural Commercial Bank
 
May 9, 2022 - April 3, 2024
 
 
 
4.79
%
 
 
380,550
 
 
 
381,211
 
Jiangnan Rural Commercial Bank
 
March 24, 2022 - March 3, 2024
 
 
 
4.79
%
 
 
887,949
 
 
 
889,491
 
Bank of America
 
April 28, 2022 - April 30, 2024
 
 
 
Prime rate +0.1
%
 
 
 
407,242
 
 
 
 857,242
 
Total
 
 
 
 
 
 
 
  
$
 
 4,494,627
  
  
$
 5,689,721
 
 
 
F-14
 
 
The loan from Bank of America is secured by the Company’s inventory.
 
Non-current
 
Bank
 
Loan period
 
 
Interest
rate
 
 
 
 
Balance at
March
31,
202
4
 
 
 
 
 
 
Balance at
December 31,
202
3
 
 
 
EIDL Loan
 
From June 26, 2020 to June 25, 2050
 
 
 
3.75
%
 
 
122,712
 
 
 
124,905
 
 
Total
 
 
 
 
 
 
 
 
$
122,712
 
 
$
124,905
 
 
10.
BALANCES WITH RELATED PARTY
 
 
1)
Related party transactions
 
For the
three months
ended
March 31, 2024 and
2023, the Company’s related party provided working capital to support the Company’s operations when needed. The borrowings were unsecured, due on demand, and interest free.
The following table summarizes the balances with the Company’s related party.
 
 
2)
Related party balances
 
Accounts
 
Name of Related Party
 
 
Note
 
 
March
31,
202
4
 
 
 
 
 
 
December 31,
202
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount due to related party
 
Lin Li, Chief Executive Officer and Chairman of the Board
 
 
 
 
 
$
1,386,943
 
 
$
302,943
 
 
 
All the above balances are due on demand, interest-free and unsecured. The Company used the funds for its operations.
 
11.
EQUITY
 
Preferred Stock
 
The Company is authorized to issue 500,000,000 shares of capital stock, consisting of 400,000,000 shares of common stock, par value US$0.001 per share, and 100,000,000 shares of preferred stock, par value US$0.001 per share. 20,000,000 shares were designated to be series A preferred stock (the “Series A Preferred Stock”) out of the 100,000,000 shares of blank check preferred stock. Each share of common stock is entitled to one vote and each share of Series A Preferred Stock is entitled to ten votes on any matter on which action of the stockholders of the corporation is sought. The Series A Preferred Stock will vote together with the common stock. Common stock and Series A Preferred Stock are not convertible into each other. Holders of Series A Preferred Stock are not entitled to receive dividends. The Series A Preferred Stock does not have liquidation preference over the Company’s Common Stock, and therefore ranks pari passu with the Common Stock in the event of liquidation.
 
Common Stock
 
The Company is authorized to issue 400,000,000 shares of common stock with par value of US$0.001 per share.  Each share of common stock entitles the holder to one vote. For the sake of comparability, the share structure as of the date of this report has been carried back in the Company’s statement of stockholders’ equity as if they had been issued and outstanding from the beginning of the first period presented.
  
 
F-15
 
 
12.
CONVERTIBLE NOTES
 
On May 16, 2022, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company sold the investors convertible notes in an aggregate principal amount of $1,000,000 (the “Convertible Notes”) that are convertible into shares of common stock of the Company (the “Conversion Shares”) with a 100% warrant coverage to purchase common stock (the “Warrants” and such shares underlying the Warrants, the “Warrant Shares”).
In the original agreement, t
he notes
were set to
be
due
on
May 16, 2024.
 
As of December 31, 2023, the Company has issued the following securities of the registrant, and believed that each of the issuance was exempt from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act regarding transactions not involving a public offering or under Regulation S of the Securities Act.
 
Purchaser
 
Date of Issuance
 
 
Security Type
 
 
Consideration
 
 
 
 
 
 
 
 
 
 
 
Hongyu Wang
 
 
May 16, 2022
 
 
 
Convertible Note
 
 
 
 US$
 
 
 
500,000
 
Sam Yan
 
 
May 16, 2022
 
 
 
Convertible Note
 
 
 
 
US$
 
 
 
500,000
 
 
Terms of Conversion or Exercise: Convertible Notes
 
The Convertible Note holders are entitled to an option to convert all of part of the outstanding principal of the Convertible Note to the Company’s ordinary shares at any time after the six-month anniversary of the issuance date of the Note or earlier if a Registration Statement covering the conversion shares has been declared effective, at conversion price of $3.50. The interest rate of the Note is 7% per annum.
 
Terms of Conversion or Exercise: Warrants
 
On May 16, 2022, the Company granted Warrants to the same investors of the Convertible exercised, in whole or in part, at any time prior to the fifth anniversary of the date such Warrants are issued. The investors can also choose to exercise the Warrant using a cashless manner based on certain formula stipulated in the Warrant agreement.
 
The Convertible Notes and Warrant
s
 are considered as one unit of accounting which contains two freestanding financial instruments. The proceeds received were allocated between the Notes and the Warrants based on their relative fair value. The beneficial conversion option within the debt instrument was booked to additional paid-in capital, and its book value will not be subsequently adjusted. The warrants were valued using the Black-Scholes Model, and the relative fair value was $1.21 on a per share basis, for total valuation of $347,171 based on 285,714 shares issuable if fully exercised. The Company used the following inputs: (1) strike price = $7.00, (2) fair market value of the Company’s stock = $10.00, (3) annualized volatility = 10%, (4) annualized dividend = 1.70%, (5) years to expiration = 5 years, and (6) risk free rate = 3.789%. Management determined that convertible note contained a beneficial conversion feature (“BCF”) and recognized a discounted to be amortized over the life of the convertible note. The BCF was valued at $672,761 and was recorded as a debt discount where the offsetting balance was recorded as an increase to additional paid in capital.
 
On April 27, 2023, the Company signed amendment agreements with the investors to modify the due date of the
Convertible Notes
to the earlier of July 12, 2023 or the three months anniversary of the completion of the Company's Initial Public Offering. On October 19, 2023, the Company signed settlement agreements with the investors to settle the
Convertible Notes
for $1,950,000 with two installments by November 24, 2023.
The balance of $1,950,000 was reclassified to
a
ccounts and other payables and accruals
. The debtors agreed to stop accruing interest on the balance.


On May 3, 2024, the Company signed final settlement agreements with the two investors of the
Convertible Notes and Warrants
 
to settle the balances of the Convertible Notes and Warrants
for $250,000 each
 investor
,
 
totaling $500,000 (Note
20
), besides
 
an aggregate of
$1,200,000 paid by the Company in 2023.
 
Convertible Notes
 
March 
31,
202
4
 
 
 
   
   
Convertible Notes – Face Value
 
$
-
 
Discount – Placement agent commissions – cash
 
 
-
 
Discount – Placement agent commissions – warrants
 
 
-
 
Discount – Detachable warrants
 
 
-
 
Discount – Beneficial conversion feature
 
 
-
 
 
 
$
 
 
 
 
F-16
 
 
13.
INCOME TAXES
 
United States of America
 
The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on March 27, 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of
March 31, 2024 and December 31, 2023
due to the recent enactment.
 
Hong Kong
 
Two-tier Profits Tax Rates
 
The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (the “Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $257,868) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Benchwick is wholly owned and under the control of Northann, it is a connected entity. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its profits tax return. The election is irrevocable. The Company elected Benchwick to be subject to the two-tier profits tax rates.
 
The provision for current income and deferred taxes of Benchwick has been calculated by applying the new tax rate of 8.25%.
 
PRC
 
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries that are not entitled to any tax holiday were subject to income tax at a rate of 25% for the
three months
ended
March
 31, 202
4
and 202
3
. According to PRC tax regulations, the PRC net operating loss can generally carry forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carry back of losses is not permitted. If not utilized, the PRC net operating loss will expire in 2026.
 
The income tax expense was $14,361and $126,984 for
the
three months
ended
March
 31, 202
4
and 202
3
, respectively, related primarily to the Company’s subsidiaries located outside of the U.S. The income before provision for income taxes for
the three months
ended
March
 31, 202
4
and 202
3
was as follows:
 
 
F-17

 
 
The income tax provision consists of the following components:
 
 
 
For the three months ended
March 31,
202
4
 
 
 
 
 
 
For the three months ended
March 31,
202
3
 
 
 
Current:
 
 
-
 
 
 
 
 
 
-
 
 
Federal
 
$
-
 
 
 
 
$
-
 
 
State
 
 
-
 
 
 
12,851
 
Foreign
 
 
-
 
 
 
1,509
 
Total current
 
$
-
 
 
$
14,361
 
 
 
 
 
 
 
 
 
 
Deferred:
 
 
-
 
 
 
 
 
Federal
 
$
-
 
 
$
-
 
State
 
 
-
 
 
 
-
 
Foreign
 
 
-
 
 
 
-
 
Total deferred
 
$
-
 
 
$
-
 
Total income tax expense
 
$
-
 
 
$
14,361
 
 
A reconciliation between the Company’s actual provision for income taxes and the provision at the United States statutory rate is as follow:
 
 
 
For the three months ended
March 31,
2024
 
 
 
 
 
 
For the three months ended
March 31,
2023
 
 
 
Income before income tax expense
 
 
$
60,035
 
 
 
$
190,846
 
Computed tax benefit with statutory tax rate
 
 
29.84
%
 
 
29.84
%

Income tax expense computed at statutory income tax rate
 
 
17,914
 
 
 
 
 
56,948
 
Impact of different tax rates in other jurisdictions
 
 
(58,145
)
 
 
(159,680
)
Tax effect of non-deductible expenses
 
 
40,231
 
 
 
 
 
108,112
 
Total income tax expense
 
$
-
 
 
 
$
5,380
 
 
The effective tax rate were 2.8% and 1.4% for the three months ended March 31, 202
4
 a
nd 202
3
, respectively.
 
Uncertain tax positions
 
The Company did not have any uncertain tax positions during
 
the
 
three months
ended
March
 31, 202
4
and 202
3
.
 
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
 
 
F-18
 
 
The amounts of uncertain tax liabilities listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as current liability in the consolidated financial statements as of December 31, 2023. The Company anticipated that the settlements with the taxing authority are remitted within one year.
 
Our policy is to include interest and penalty charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest of $nil as of
 
March 31, 2024 and 2023
,
 
respectively.
 
The statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the due date of the profits tax return or the date on which it was filed, whichever is later.
 
In accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.
 
In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.
 
14.
CHINA CONTRIBUTION PLAN
 
The Company participates in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond their monthly contributions. For the
three months
ended
March
31, 202
4
and 202
3
, the Company contributed a total of $69,131 and $118,261, respectively, to these funds.
 
15.
OPERATING LEASE
 
The Company has operating leases for its office facilities. The lease is located at 9820 Dino Drive, Suite 110, Elk Grove, California, 95624, which consist of approximately 3,653 square meters. The
Company’s
leases have remaining terms of approximately 37 months for a lease term commencing on August 1, 2020 and
ended
on August 31, 2023. The lease was renewed for additional 36 months. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes.
 
The following table provides a summary of leases by balance sheet location as of
March 31, 2024 and
December 31, 2023:
 
Assets/liabilities
 
March
31,
202
4
 
 
 
 
December 31,
202
3
 
 
Assets
 
 
 
 
 
 
 
 
Operating lease right-of-use assets
 
$
79,673
 
 
$
87,380
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Operating lease liability - current
 
$
31,807
 
 
$
31,413
 
Operating lease liability - non-current
 
 
47,866
 
 
 
55,967
 
Total lease liabilities
 
$
79,673
 
 
$
87,380
 
 

Cash flow information related to operating leases consists of the following:
 
 
 
For the three months
ended March 31, 2024
 
 
For the three months
Ended March 31, 2023
 
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
8,767
 
 
$
6,069
 
Right-of-use assets obtained in exchange for new lease obligations:
 
 
-
 
 
 
-
 

 
F-19
 
 
The operating lease expenses for the
three months
ended
March
31, 202
4
and 202
3
were as follows:
 
Lease Cost
 
Classification
 
 
For the three
months ended
March
31,
202
4
 
 
 
 
 
 
 
 
For the three
months ended
March
31,
202
3
 
 
 
 
Operating lease expense
 
 
General and administrative expenses
 
 
$
8,767
 
 
$
30,274
 
 
Maturities of operating lease liabilities as of
March
 31, 202
4
 were as follows:
 
Maturity of Lease Liabilities
 
Operating
Leases
 
 
Within one year
 
 
26,302
 
Within a period of more than one year but not more than two years
 
$
35,069
 
Within a period of more than two year but not more than three years
 
 
23,379
 
Within a period of more than three year but not more than four years
 
 
-
 
Within a period of more than four years but not more than five years
 
 
-
 
More than five years
 
 
-
 
Total lease
commitment
 
$
84,750
 
Less: interest
 
 
(5,077
)
Present value of lease payments
 
$
79,673
 
 
Lease liabilities include lease and non-lease component such as management fee.

Lease Term and Discount Rate
 
March
31,
202
4
 
 
 
 
December 31,
202
3
 
 
Weighted-average remaining lease term (years)
 
 
 
 
 
 
 
 
 
 
Operating leases
 
 
2.67
 
 
 
 
 
2.92
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average discount rate (%)
 
 
 
 
 
 
 
 
 
 
Operating leases
 
 
5
%
 
 
5
%
 
16.
CONCENTRATIONS AND CREDIT RISK
 
(a)
Concentrations
 
During the
three months
ended
March
31, 202
4
, two customers accounted for nearly
81
% of the Company’s revenues. During the
three months
ended
March
31, 202
3, two customers accounted for nearly
33
% of the Company’s revenues.  No other customer accounts for more than 10% of the Company’s revenue in the
three months
ended
March
31, 202
4
and 202
3
.
 
As of
March
31, 202
4
, five customers accounted for 84% of the Company’s accounts receivable. As of December 31, 202
3
,
five
customers accounted for
72
% of the Company’s accounts receivable. No other customer accounts for more than 10% of the Company’s accounts receivable
for the three months ended March 31, 202
4
and for the year ended December 31, 202
3
.
 
F-20
 
During the
three
months
ended
March
31, 202
4
,
no
supplier accounts for over 10% of the Company’s cost of revenues. During the
three months
ended
March
31, 202
3
, five suppliers accounted for a total of
73
% of the Company’s cost of revenues. No other supplier accounts for over 10% of the Company’s cost of revenues.
 
As of
March
31, 202
4
, no supplier accounted for over
10
% of the Company’s accounts payable. As of December 31, 202
3
,
no
supplier accounted for
20
% of the Company’s accounts payable.
 
(b)
Credit risk
 
Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash. As of
March 31, 2024 and December 31, 2023
, substantially all of the Company’s cash were held by major financial institutions located in the PRC, Hong Kong, and the United States, which management believes are of high credit quality. Deposits in the United States up to $250,000 are insured by the Federal Depository Insurance Corporation.
 
For the credit risk related to trade accounts receivable, the Company performs ongoing credit evaluations of its customers and, if necessary, maintains reserves for potential credit losses. Historically, such losses have been within management’s expectations.
 
17.
CAPITAL COMMITMENTS
 
On July 26, 2021, the Company has contracted Changzhou Wanyuan Construction Engineering Co. to build a second phase of its factory. The amount required in the contract is $10 million. Construction is expected to take approximately one and half year, and the second phase of the factory will be approximately 250,000 square feet.
 
18.
STOCK SPLIT
 
Effective on July 6, 2023, the Company implemented a 
2-for-1
 reverse stock split of the issued and outstanding shares. Under the reverse split, every two shares of outstanding shares issued and outstanding were automatically converted into one share of ordinary share, with a par value of US$ 0.001 each. Except as otherwise indicated, all information in the consolidated financial statements concerning share and per share data gives retroactive effect to the 
2-for-1
reverse stock split. The total number of outstanding common shares immediately before the reverse split was 40,000,000 and immediately after the reverse split was 20,000,000. The total number of outstanding preferred shares immediately before the reverse split was 10,000,000 and immediately after the reverse split was 5,000,000.
 
19.
SECURED BORROWING ARRANGEMENT
 
In July 2023, the Company signed a secured borrowing agreement with a financial institution in the United States, in which the Company borrowed $1,000,000 secured by its accounts receivable amounted $1,491,000.
 
It is scheduled under the agreement that the Company pays $49,700 per week for thirty weeks to the financial institution to repay the loan.
 
20
.
SUBSEQUENT EVENT

The Company has analyzed its operations subsequent to December 31, 2023 and up through
May
20
,
2024 which is the date these consolidation financial statements were issued, except as disclosed herein, there is no any material subsequent events to disclose in these consolidated financial statements.
 
On
May 3
, 202
4
, the Company signed final settlement agreements with the two investors of the
 
Convertible Notes and Warrants
 
to settle the balances of the
 
Convertible Notes and Warrants
 
for $250,000 each
 
investor
,
 
totaling $500,000.
 
 
F-21
 
 
2
1
.
UNRESTRICTED NET ASSETS
 
The following presents condensed financial information of Northann Corp:
 
Condensed Financial Information on Financial Position
 
 
 
As of
March 31,
 
 
 
 
As of
December 31,
 
 
 
 
202
4
 
 
202
3
 
 
 
(Unaudited)
 
 
 
 
Cash
 
 
742
 
 
 
370
 
Amounts due from subsidiaries
 
 
4,603,188
 
 
 
5,504,920
 
Total current assets
 
 
4,603,929
 
 
 
5,505,290
 
All other non-current assets
 
 
 
 
 
 
-
 
Interests in a subsidiary
 
 
8,628,815
 
 
 
9,948,890
 
Total Assets
 
 
13,232,744
 
 
 
15,454,180
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Deficit
 
 
 
 
 
 
 
 
All other current liabilities
 
 
71,169
 
 
 
599,664
 
Amounts due to subsidiaries
 
 
10,499,226
 
 
 
10,660,508
 
Total current liabilities
 
 
10,570,395
 
 
 
11,260,172
 
Non-current liabilities
 
 
1,950,000
 
 
 
1,950,000
 
Total Liabilities
 
 
12,520,395
 
 
 
13,210,172
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity (Deficit)
 
 
 
 
 
 
 
 
Preferred stock – Series A, $0.001 par value, 100,000,000 shares authorized, 10,000,000 shares issued and outstanding as of March 31, 2023 and December 31, 2022
 
 
5,000
 
 
 
5,000
 
Common stock, $0.001 par value, 400,000,000 shares authorized, 40,000,000 shares issued and outstanding as of March 31, 2023 and December 31, 2022
 
 
21,380
 
 
 
21,380
 
Subscription receivable
 
 
(25,000
)
 
 
(25,000
)
Additional Paid-in Capital
 
 
6,671,016
 
 
 
6,671,016
 
Retained earnings (accumulated deficit)
 
 
(5,253,908
)
 
 
(3,652,547
 
Accumulated other comprehensive income (loss)
 
 
(706,139
)
 
 
(775,841
)
Total Stockholders’ Equity (Deficit)
 
 
712,349
 
 
 
2,244,008
 
Total Liabilities and Stockholders’ Deficit
 
 
13,232,744
 
 
 
15,454,180
 
 
* Retrospectively restated for the effect of 2-for-1 reverse stock split. (Note 18)
 
 
F-22
 
 
Condensed Financial Information on Results of Operations
 
 
 
For the
three
months
ended
March 31,
 
 
 
 
 
 
 
 
 
 
For the
three
months
ended
March 31,
 
 
 
 
 
 
 
202
4
 
 
202
3
 
 
 
(Unaudited)
 
Revenue
 
 
-
 
 
 
-
 
Cost or revenues
 
 
-
 
 
 
-
 
Operating expenses
 
 
372,865
 
 
 
123,288
 
Income taxes
 
 
-
 
 
 
-
 
Income (loss) – Parent only
 
 
(372,865
)
 
 
(123,288
)
Income (loss) – Subsidiaries with unrestricted net assets
 
 
577,523
 
 
 
429,006
 
(Loss) income – Subsidiaries with restricted
net a
ssets
 
 
(144,623
)
 
 
(120,252
)
Net income – Consolidated
 
 
60,035
 
 
 
185,466
 
 
Condensed Financial Information on Cash Flows
 
 
 
For the
three
months
ended
March 31,
 
 
 
 
 
 
 
 
 
 
For the
three
months
ended
March 31,
 
 
 
 
 
 
 
202
4
 
 
202
3
 
 
 
(Unaudited)
 
Cash from operating activities
 
 
528,867
 
 
 
5,140
 
Cash used in investing activities
 
 
 
 
 
 
 
 
Cash from financing activities
 
 
(528,495
)
 
 
(5,000
)
Effect of exchange rates on cash
 
 
-
 
 
 
-
 
Net cash flows
 
 
372
 
 
 
140
 
Beginning cash balance
 
 
370
 
 
 
224
 
Ending cash balance
 
 
742
 
 
 
364
 
 
 
(i)
Basis of presentation
 
The condensed financial information reflects the accounts of the Company. The condensed financial information should be read in connection with the consolidated financial statements and notes thereto. The condensed financial information is presented as if the incorporation of the Company were in effect since January 1, 2020, and throughout the four years ended December 31, 2023.
 
 
(ii)
Restricted Net Assets
 
Schedule I of Rule 5-04 of Regulation S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.). The Company’s only assets are its equity interests in its subsidiaries. Unrestricted net assets are held in the Company’s subsidiaries located in the US and Hong Kong. The Company does maintain substantial assets and operating subsidiaries in China; therefore, the ability for operating subsidiaries to pay dividends or transfer assets to the Company may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries.
 
As of December 31, 2023 and 2022, there were no material contingencies, significant provisions of long-term obligations, mandatory dividend or redemption requirements of redeemable stocks or guarantees of the Company, except for those which have been separately disclosed in the Consolidated Financial Statements, if any.
 
 
F-23
 
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Results of Operations
 
Comparison for the Three Months Ended March 31, 202
4
and 202
3
 
The following table sets forth key components of our results of operations for the three months ended March 31, 202
4
and 202
3
, both in dollars and as a percentage of our revenues.
 
 
 
Three Months Ended March 31,
 
 
 
202
4
 
 
202
3
 
 
 
Amount
 
 
of Revenue
 
 
Amount
 
 
of Revenue
 
Revenues
 
 
4,595,531
 
 
 
100.00
%
 
 
2,734,933
 
 
 
100.00
%
Cost of revenues
 
 
3,051,541
 
 
 
64.40
%
 
 
1,484,991
 
 
 
54.30
%
Gross profit
 
 
1,543,990
 
 
 
34.00
%
 
 
1,249,942
 
 
 
45.70
%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
 
 
218,375
 
 
 
4.75
%
 
 
198,491
 
 
 
7.26
%
General and administrative expenses
 
 
485,037
 
 
 
10.55
%
 
 
355,127
 
 
 
12.98
%
Research and development expenses
 
 
512,597
 
 
 
11.15
%
 
 
300,212
 
 
 
10.98
%
Finance Cost
 
 
-
 
 
 
-
 
 
 
 
-
 
 
 
-
Income from operations
 
 
327,981
 
 
 
0.07
%
 
 
396,112
 
 
 
14.48
%
Other Income (expenses)
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
(267,948
)
 
 
(5.83
)%
 
 
(87,737
)
 
 
(3.21
)%
Amortization of debt discounts
 
 
-
 
 
 
(0.00
)%
 
 
(123,288
)
 
 
(4.51
)%
Other income
 
 
-
 
 
 
0.00
%
 
 
159
 
 
 
0.01
%
Other expenses
 
 
-
 
 
 
0.00
%
 
 
-
 
 
 
0.00
%
Exchange loss
 
 
-
 
 
 
0.00
%
 
 
5,600
 
 
 
0.20
%
Net Income before taxes
 
 
(267,948
)
 
 
(5.83
)%
 
 
190,846
 
 
 
6.98
%
Income tax benefit (expenses)
 
 
-
 
 
 
0.00
)
%
 
 
(5,380
)
 
 
(0.20
)%
Net income
 
 
60,033
 
 
 
0.01
%
 
 
185,466
 
 
 
6.78
%
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
69,702
)
 
 
 
0.02
%
 
 
373,736
 
 
 
13.67
%
Total comprehensive income
 
 
129,735
 
 
 
0.03
%
 
 
559,202
 
 
 
20.45
%
 
Revenues.
Our revenues were $4,595,531 for the three months ended March 31, 202
4
, representing a
n
in
crease of $1,860,598 or
68
% from $
2,734,933
for the three months ended March 31, 202
3
. The
in
crease was mainly due to a
n increase in customer demand and our
sales volume in the three months ended March 30, 202
4
as compared to the same period in 202
3
.
 
Cost of revenues.
Our cost of revenues was $3,051,541 for the three months ended March 31, 2024, compared to $1,484,991 for the same period in 2023. Cost of revenues refers to the cost of material and labor cost; the percentage of direct material was over 90% of the total cost of revenues. The increase of cost of revenues compared to the three months ended March 30, 2023 was primarily due to the increase in our revenues and increase in purchase price of raw material. We paid tariffs of $89,390 during the three months ended March 30, 2024, and $60,309 during the three months ended March 30, 2023. The increase in tariff was mainly due to increase in revenue.
 
Gross profit and gross margin.
Our gross profit was $
1,543,990
for the three months ended March 31, 202
4
, compared with a gross profit of $1,249,942 for the same period in 202
3
. Gross margin
de
creased from
45.70
% for the three ended March 31, 202
3
to
33.6
% for the three months ended March 31, 202
4 due to
higher
purchase price of our raw material
.
 
2
 

Selling expenses. As shown below, our selling expenses consist primarily of compensation and benefits to our selling department and other expenses incurred in connection with general operations. Our selling expenses decreased by $19,884 to $ 218,375 for the three months ended March 31, 202
4
, from $
198,481
for the same period in 202
3, which was mainly caused by increase of $46,135 in advertising fee, and partially offset by a decrease in travel fee of $22,306 and other items with minor changes.
 
 
 
March 31, 202
4
 
 
March 31, 202
3
 
 
Fluctuation
 
 
 
Amount
 
 
Proportion
 
 
Amount
 
 
Proportion
 
 
Amount
 
 
Proportion
 
Salaries and Social Insurance
 
 
83,131
 
 
 
38.07
%
 
 
92,284
 
 
 
46.49
%
 
 
(9,153
)
 
 
(9.92
)%
Freight insurance
 
 
18,240
 
 
 
8.35
%
 
 
18,286
 
 
 
9.21
%
 
 
(46
)
 
 
(0.25
)%
Rent
 
 
11,924
 
 
 
5.46
%
 
 
6,627
 
 
 
3.34
%
 
 
5,297
 
 
 
0.80
%
Advertising fee
 
 
77,843
 
 
 
35.65
%
 
 
31,708
 
 
 
15.98
%
 
 
46,135
 
 
 
1.45
%
Travel fee
 
 
27,237
 
 
 
12.47
%
 
 
49,543
 
 
 
24.96
%
 
 
(22,306
)
 
 
(45.02
)%
Others
 
 
-
 
 
 
0.00
%
 
 
43
 
 
 
0.02
%
 
 
(43
)
 
 
(100.00
)%
Total selling expenses
 
 
218,375
 
 
 
100.00
%
 
 
198,491
 
 
 
 
 
 
 
100.00
%
 
 
19,884
 
 
 
0.10
%
 
General and administrative expenses.
As shown below, our general and administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional fees and other expenses incurred in connection with general operations. Our general and administrative expenses increased by $129,910 to $ 485,037 for the three months ended March 31, 2024, from $355,127 for the same period in 2023. The increase was mainly caused by the increase of service fees for legal, auditing and other professional services in connection with our new public company status starting from the last quarter of 2023.
 
 
 
March 31, 202
4
 
 
March 31, 202
3
 
 
Fluctuation
 
 
 
Amount
 
 
Proportion
 
 
Amount
 
 
Proportion
 
 
Amount
 
 
Proportion
 
Salary and Social Insurance
 
 
41,583
 
 
 
8.57
%
 
 
44,491
 
 
 
12.53
%
 
 
(2,908
)
 
 
(6.54
)%
Service fees
 
 
286,281
 
 
 
59.02
%
 
 
155,590
 
 
 
43.81
%
 
 
130,691
 
 
 
84.00
%
Royalty fee
 
 
5,820
 
 
 
1.
20
%
 
 
6,902
 
 
 
1.95
%
 
 
(1,082
)
 
 
(15.68
)%
Entertainment expenses
 
 
20,928
 
 
 
4.3
1
%
 
 
15,530
 
 
 
4.37
%
 
 
5,398
 
 
 
34.76
%
Taxation
 
 
11
 
 
 
0.00
%
 
 
-
 
 
 
0.00
%
 
 
11
 
 
 
0.00
%
Depreciation and amortization
 
 
24,633
 
 
 
5.08
%
 
 
34,975
 
 
 
9.85
%
 
 
(10,342
)
 
 
(29.57
)%
Bad debt
 
 
-
 
 
 
0.00
%
 
 
-
 
 
 
0.00
%
 
 
-
 
 
 
0.00
%
Rent
 
 
8,954
 
 
 
1.85
%
 
 
11,377
 
 
 
3.20
%
 
 
(2,423
)
 
 
(21.30
)%
Travel fee
 
 
19,689
 
 
 
4.06
%
 
 
28,666
 
 
 
8.07
%
 
 
(8,977
)
 
 
(31.32
)%
Office expenses
 
 
35,370
 
 
 
7.
29
%
 
 
25,208
 
 
 
7.10
%
 
 
10,162
 
 
 
40.31
%
Other
 
 
41,768
 
 
 
8.61
%
 
 
32,388
 
 
 
9.12
%
 
 
9,380
 
 
 
28.96
%
Total general and administrative expenses
 
 
485,037
 
 
 
100.00
%
 
 
355,127
 
 
 
100.00
%
 
 
129,910
 
 
 
36.58
%
 
Research and development expenses.
Our research and development expenses were $512,597 for the three months ended March 31, 2024, compared to $300,211 for the same period in 2023. The increase was primarily due to more projects in research and development process during the three months ended March 31, 2024 as compared to the same period in 2023.
 
Income tax expense.
Our Income tax expense was $
nil
for the three months ended March 31, 202
4
and $5,380 for the three months ended March 31, 202
3
.
 
Net income.
As a result of the cumulative effect of the factors described above, our net income was $
549
,
800
for the three months ended March 31, 202
4
and $185,466 for the three months ended March 31, 202
3
. The
increase
was primarily due to the
in
crease in revenue.
 
3
 
 

Liquidity and Capital Resources
 
As of March 31, 202
4 and
December 31, 202
3
, we had cash of $
590,169, and $1,101,443, respectively
. To date, we have financed our operations primarily through our business operations, borrowings from our stockholders, related and unrelated parties
, and proceeds from IPO.
 
The Company believes that its current levels of cash and cash flows from operations will be sufficient to meet its anticipated cash needs for at least the next twelve months. However, it may need additional cash resources in the future if it finds and wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it determines that its cash requirements exceed its amounts of cash on hand or if it decides to further optimize its capital structure, it may seek to issue additional debt or equity securities or obtain credit facilities or other sources of funding.
 
The following table set forth a summary of its cash flows for the periods indicated:
 
 
 
For the Three Months Ended
 
 
 
March 31,
 
 
 
202
4
 
 
202
3
 
Net cash
provided by 
(used in) operating activities
 
$
297,897
 
 
$
(895,440
)
Net cash (used in) investing activities
 
$
270,242
 
$
(159,398
)
Net cash (used in )
 
provided by  financing activities
 
$
(641,782
)
 
$
521,943
 
 
Operating Activities
 
Net cash
provided by
operating activities was $
297
,
897
for the three months ended March 31, 202
4
, as compared to $895,440 net cash used in operating activities for the three months ended March 31, 202
3
.
 
The net cash
provided by
operating activities for the three months ended March 31, 202
4
mainly included
net income of $60,035, decrease in account payables of $206
,537,
and minor change of other accounts
.
The net cash used in operating activities for the three months ended March 31, 202
3
mainly included our net income of $
185,466,
an increase in
inventories
of $
1,233,379
,
an de
crease in accounts payable of $
775,741, and partially offset by an decrease in account receivable of $478,162.
 
 
Investing Activities
 
Net cash used in investing activities was $270,242 for the three months ended March 31, 2024, as compared to $159,398 net cash used in investing activities for the three months ended March 31, 2023. The net cash used in investing activities for the three months ended March 31, 2024 mainly included the payments for construction. The net cash used in investing activities for the three months ended March 31, 2023 mainly consisted of purchase of property and equipment and the payment for construction in process and land used right.  
 
Financing Activities
 
Net cash
used in
financing activities for the three months ended March 31, 202
4
was $
641,782
, as compared to net cash
provided by
financing activities of $521,943 for the three months ended March 31, 202
3
. The change was mainly due to the borrowing amounting $1,084,000 
from
the related part
y
of our Company, and repayment of borrowings totaling $1,725,782 during the three months ended March 31, 2024.
 
 
Contractual Obligations
 
The Company’s subsidiary NDC has an operating lease primarily for its corporate office and equipment. The lease contract was within three years and the renewal was at landlord’s discretion.
 
Operating lease expenses were $
8,767
and $
7
,
56
9 for the three months ended March 31, 202
4
and 202
3
, respectively.
 
4
 

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Not applicable as we are a “smaller reporting company” as defined by Item 229.10(f)(1) of Regulation S-K.
 
 
 
Item 4. Controls and Procedures
 
 
 
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (principal executive officer) and Interim Chief Financial Officer (principal financial officer and principal accounting officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in § 240.13a-15(e) or 240.15d-15(e) of Regulation S-K) were effective at ensuring that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is (1) accumulated and communicated to management, including the Company’s Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
  
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.
 
 
 
 
 
 
 
5
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
 
None.
 
 
 
Item 1A. Risk Factors
 
 
 
As a smaller reporting company, we are not required to make disclosures under this item.
 
 
 
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.
 
 
 
None.
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
 
None.
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
Not applicable.
 
 
 
Item 5. Other Information
 
 
 
Settlement Agreements
 
On May 3, 2024, the Company entered into separate settlement agreements (each, and “Agreement, and collectively, the “Agreements”) with each of Hongyu Wang and Sam Yan (each, an “Investor”, and collectively, the “Investors”), and each on similar terms. The Agreements set out the terms for a full and final settlement between the Company and each of the Investors arising out of a number of previous agreements between the Company and each of the Investors, including but not limited to (i) that securities purchase agreement between the Company and each Investor dated May 12, 2022, (ii) that promissory note issued by the Company in favor of each Investor for a principal amount of US$500,000, dated May 16, 2022, and further amended pursuant to the amendment agreement entered by the parties on April 27, 2023 (each, a “Convertible Note”, and collectively, the “Convertible Notes”), and (iii) that warrant for the purchase of 142,857 of the Company’s shares, issued by the Company in favor of each Investor dated May 16, 2022 (each, the “Warrant” and collectively, the “Warrants”).
 
 
 
Specifically, pursuant to each of the Agreements, the Company and each Investor agrees that, upon the requirements set forth at Section 2 of each Agreement therein, and the payment of the settlement sum of $250,000 to each Investor within 15 business days after May 3, 2024), the Company and each Investor shall fully and forever, irrevocably and unconditionally, release, waive and discharge the other party, of and from any and all outstanding rights and obligations, that such party may now have, has ever had or may hereafter have, against the other party, in accordance with section 3 of each Agreement, and shall undertake not to sue the other party, in accordance with section 4 of each Agreement.
 
 
 
Additionally, once the settlement sums have been paid, the Convertible Notes and the Warrants shall be terminated in full and rendered null and void, and all past, current, or future obligations of the parties under the Convertible Notes and the Warrants shall be extinguished. 
 
6
 
 
 
Item 6. Exhibits
 
 
 
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report.
 
 
Exhibit No.
 
Description






101.INS
 
Inline XBRL Instance Document
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 
*
Filed herewith.
 
**
Furnished herewith. This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filings of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
 
 

^
Certain terms have been omitted pursuant to Item 601(b)(2)(ii) of Regulation S-K. The Registrant hereby undertakes to furnish copies of any of the terms upon request by the SEC.
 
Exhibits and schedules to this Exhibit have been omitted pursuant to Regulation S-K Item 601(a)(5). The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.
 
 
 
7
 
 
 
SIGNATURES
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Northann Corp.
 
 
 
Date: May 20, 2024
By:
/s/ Lin Li
 
Name:
Lin Li
 
Title:
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: May 20, 2024
By:
/s/ Sunny S. Prasad
 
Name:
Sunny S. Prasad
 
Title:
Interim Chief Financial Officer
 
 
(Principal Accounting and Financial

Officer)
 
 
8