UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

FORM 10-Q

(Mark One)

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Quarterly Period Ended March 31, 2021September 30, 2023

or

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number: 000-56215

WETOUCH TECHNOLOGY INC.

(Exact name of registrant as specified in its charter)

Nevada20-4080330

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

No.29, Third Main Avenue, Shigao Town, Renshou County

Meishan, Sichuan, China620500

(Address of principal executive offices) (Zip Code)

(86)028-37390666

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)

Name of each exchange on which registered

NoneN/AN/A

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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File to be submitted posted 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 [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition 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[X]
(Do not check if a 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 [X]

As of May 21, 2021,November 13, 2023, the registrant had 31,811,5239,732,948 shares of common stock issued and outstanding.

 

 

 

 

 

WETOUCH TECHNOLOGY INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2021September 30, 2023

TABLE OF CONTENTS

PAGE
PART I - FINANCIAL INFORMATION 3
Item 1.Financial Statements4
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations5
Item 3.Quantitative and Qualitative Disclosures About Market Risk 1315
Item 4.Controls and Procedures 1315
PART II - OTHER INFORMATION 14
Item 1.Legal Proceedings 1416
Item 1A.Risk Factors 1416
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 1416
Item 3.Defaults Upon Senior Securities 1416
Item 4.Mine Safety Disclosure 1416
Item 5.Other Information16
Item 6.Exhibits16
SIGNATURES17

 2 
Item 5.Other Information 14
Item 6.Exhibits 14
SIGNATURES15

2

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include, among others, those statements including the words “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans” and words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Forward-looking statements are based on our current expectations and assumptions regarding our business, potential target businesses, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and regulatory conditions.

A description of these and other risks and uncertainties that could affect our business appears in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20202022 which we filed with the Securities and Exchange Commission (“SEC”) on March 24, 2021April 17, 2023 (the “Annual Report”). The risks and uncertainties described under “Risk Factors” are not exhaustive.

Given these uncertainties, readers of this Quarterly Report on Form 10-Q (“Quarterly Report”) are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

 

3

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the SEC, and should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report, as updated in subsequent filings we have made with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

WETOUCH TECHNOLODYTECHNOLOGY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2021 (UNAUDITED)SEPTEMBER 30, 2023

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets at March 31, 2021 (Unaudited)September 30, 2023 and December 31, 2020 (unaudited)2022 (Unaudited)F-1
Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended March 31, 2021September 30, 2023 and 20202022(Unaudited)F-2
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended March 31, 2021September 30, 2023 and 20202022 (Unaudited)F-3
Condensed Consolidated Statements of Cash Flows for the three and nine months ended March 31, 2021September 30, 2023 and 2020 2022 (Unaudited)F-4
Notes to Condensed Consolidated Financial StatementsF-5 - F-9F-16

4

 

WETOUCH TECHNOLODYTECHNOLOGY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

  As of March 31,  As of December 31, 
  2021  2020 
       
ASSETS        
CURRENT ASSETS        
Cash $54,478,833  $23,963,861 
Accounts receivable, net  4,502,711   11,926,835 
Inventories  195,057   402,050 
Due from related parties  -   76,619 
Prepaid expenses and other current assets  16,109   228,443 
TOTAL CURRENT ASSETS  59,192,710   36,597,808 
         
Property, plant and equipment, net  -   9,491,195 
Intangible assets, net  -   974,696 
TOTAL ASSETS $59,192,710  $47,063,699 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
CURRENT LIABILITIES        
Accounts payable $2,008,034  $891,848 
Amount due to related parties  628,604   529,060 
Income tax payable  783,098   107,137 
Accrued expenses and other current liabilities  186,036   503,455 
Deferred grants  -   245,211 
TOTAL CURRENT LIABILITIES  3,605,772   2,276,711 
         
Deferred grants-non current  -   433,206 
TOTAL LIABILITIES $3,605,772  $2,709,917 
         
COMMITMENTS AND CONTINGENCIES        
STOCKHOLDERS’ EQUITY        
Common stock, $0.001 par value, 300,000,000 shares authorized, 31,811,523 and 31,500,693 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively $31,812  $31,501 
Additional paid in capital  4,221,727   1,072,932 
Statutory reserve  3,062,159   3,062,159 
Retained earnings  47,590,531   39,229,282 
Accumulated other comprehensive income  680,709   957,908 
TOTAL STOCKHOLDERS’ EQUITY  55,586,938   44,353,782 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $59,192,710  $47,063,699 

(Unaudited)

       
  As of
September 30,
  As of
December 31,
 
  2023  2022 
       
ASSETS        
CURRENT ASSETS        
Cash $93,936,779  $51,250,505 
Accounts receivable, net  13,931,782   9,057,741 
Inventories  203,922   423,276 
Prepaid expenses and other current assets  1,043,270   1,450,620 
TOTAL CURRENT ASSETS  109,115,753   62,182,142 
         
Property, plant and equipment, net  10,319,680   10,923,610 
TOTAL ASSETS $119,435,433  $73,105,752 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
CURRENT LIABILITIES        
Accounts payable $1,502,743  $1,383,094 
Loan from a third party  385,791   385,791 
Due to a related party  -   1,665 
Income tax payable  1,150,001   22,152 
Accrued expenses and other current liabilities  3,062,051   944,624 
Convertible promissory notes payable  1,234,355   1,277,282 
TOTAL CURRENT LIABILITIES  7,334,941   4,014,608 
         
Common stock purchase warrants liability  381,241   256,957 
TOTAL LIABILITIES $7,716,182  $4,271,565 
         
COMMITMENTS AND CONTINGENCIES (Note 13)  -     
STOCKHOLDERS’ EQUITY        
Common stock, $0.001 par value, 15,000,000 shares authorized, 9,732,948 and 1,680,248 issued and outstanding as of September 30, 2023 and December 31, 2022, respectively* $9,733  $1,680 
Additional paid in capital*  43,514,125   3,402,178 
Statutory reserve  6,040,961   6,040,961 
Retained earnings  72,692,092   62,366,892 
Accumulated other comprehensive loss  (10,537,660)  (2,977,524)
TOTAL STOCKHOLDERS’ EQUITY  111,719,251   68,834,187 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $119,435,433  $73,105,752 

*Retrospectively restated for effect of reverse stock split (1-for-20), see Note 10 (2)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-1

 

WETOUCH TECHNOLODYTECHNOLOGY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

         
 For the three months ended March 31,  Three-Month Period Ended Nine-Month Period Ended 
 2021 2020  September 30,  September 30, 
      2023 2022 2023 2022 
REVENUES      $11,123,605  $11,623,018  $37,331,498  $35,370,499 
Revenues from customers $10,615,924  $3,509,092 
Revenues from related parties  97,380  - 
TOTAL REVENUES 10,713,304 3,509,092 
COST OF REVENUES  (5,571,806)  (1,872,783)  (6,346,079)  (6,561,166)  (20,261,755)  (20,946,893)
GROSS PROFIT  5,141,498  1,636,309   4,777,526   5,061,852   17,069,743   14,423,606 
                     
OPERATING EXPENSES                     
Selling expenses (87,823) (18,705)  (265,526)  (214,719)  (397,591)  (1,231,967)
General and administrative expenses (494,897) (208,277)  (205,940)  (88,063)  (1,929,603)  (903,547)
Research and development expenses (22,180) (15,342)  (20,580)  (20,737)  (61,849)  (65,307)
Share-based compensation  (3,149,106)  - 
Total operating expenses  (3,754,006)  (242,324)
OPERATING EXPENSES  (492,046)  (323,519)  (2,389,043)  (2,200,821)
                     
INCOME FROM OPERATIONS  1,387,492  1,393,985   4,285,480   4,738,333   14,680,700   12,222,785 
                     
OTHER INCOME (EXPENSES)     
     
Interest income 22,015 19,617   30,616   29,621   89,845   89,257 
Interest expense (4) (2,969)  (139,876)  (58,692)  (211,383)  (172,255)
Government grant 691,713 71,648 
Gain on asset disposal  7,611,646  - 
TOTAL OTHER INCOME , NET  8,325,370  88,296 
Gain (loss) on changes in fair value of common stock purchase warrants liability  (169,067)  (187,109)  (124,283)  35,542 
TOTAL OTHER LOSS  (278,327)  (216,180)  (245,821)  (47,456)
                     
INCOME BEFORE INCOME TAX EXPENSE 9,712,862 1,482,281   4,007,153   4,522,153   14,434,879   12,175,329 
                     
INCOME TAX EXPENSE  (1,351,613)  (222,787)  (1,148,185)  (1,232,629)  (4,109,679)  (3,392,587)
                     
NET INCOME $8,361,249 $1,259,494  $2,858,968  $3,289,524  $10,325,200  $8,782,742 
                     
OTHER COMPREHENSIVE INCOME (LOSS)                     
Foreign currency translation adjustment  (277,199)  (550,418)  (674,209)  (4,195,353)  (7,560,136)  (7,597,937)
COMPREHENSIVE INCOME $8,084,050 $709,076 
COMPREHENSIVE INCOME (LOSS) $2,184,759  $(905,829) $2,765,064  $1,184,805 
                     
EARNINGS PER COMMON SHARE     
EARNINGS PER COMMON SHARE*                
Basic $0.25 $0.04 *$0.29  $2.01  $1.13  $5.47 
Diluted $0.25 $0.04 *$0.29  $2.01  $1.13  $5.12 
     
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING*                     
Basic  31,810,834  28,000,000 * 9,712,404   1,639,881   9,135,132   1,604,328 
Diluted  32,652,474  28,000,000 * 9,794,357   1,637,024   9,224,423   1,715,956 

*Retrospectively restated for effect of reverse stock split (1-for-20), see Note 10 (2)

*Retrospectively restated for effect of recapitalization, see Note 1

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-2

 

WETOUCH TECHNOLODY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

                      
  

Common stock at

Par value $0.001

  

Additional

paid-in

  Statutory  Retained  

Accumulated

other

comprehensive

  

Total

stockholders’

 
  Shares  Amount  capital  reserve  Earnings  loss  equity 
                      
Balance at July 1, 2022*  1,601,952  $1,602  $2,363,831  $5,067,243  $60,103,382  $(1,137,416) $66,398,642 
                             
Shares issued cashless for warrants  65,325   65   (65)  -   -   -   - 
Net income  

-

   

-

   

-

   

-

   3,289,524   

-

   3,289,524 
Foreign currency translation adjustment  -   -   -   -   -   (4,195,353)  (4,195,353)
                             
Balance at September 30, 2022  1,667,277  $1,667  $2,363,766  $5,067,243  $63,392,906  $(5,332,769) $65,492,813 

 

 

Common stock at

Par value $0.001

 

Additional

paid-in

  Statutory  Retained  

Accumulated

other

comprehensive

 

Total

stockholders’

  Common stock at Par value $0.001  Additional paid-in  Statutory  Retained  Accumulated other comprehensive  Total stockholders’ 
 Shares  Amount  capital  reserve  Earnings  loss  equity  Shares  Amount  capital  reserve  Earnings  loss  equity 
                              
Balance at December 31, 2019*  28,000,000  $28,000  $14,034  $2,003,569  $31,357,494  $(1,734,988) $31,668,109 
Balance at July 1, 2023*  9,695,248  $9,695  $43,394,163  $6,040,961  $69,833,124  $(9,863,451) $109,414,492 
                                                        
Fraction shares issued due to reverse stock split  5,362   6   (6)  -       --   - 
Exercise of warrants issued to third parties in conjunction with debt issuance in 2021  7,338   7   (7)  -   -   -   - 
Stock issuance for convertible promissory notes payable  25,000   25   119,975   -   -   -   120,000 
Net income                  1,259,494       1,259,494   -   -   -   -   2,858,968   -   2,858,968 
Foreign currency translation adjustment  -   -   -   -   -   (550,418)  (550,418)  -   -   -   -   -   (674,209)  (674,209)
                                                        
Balance at March 31, 2020  28,000,000  $28,000  $14,034  $2,003,569  $32,616,988  $(2,285,406) $32,377,185 
Balance at September 30, 2023  9,732,948  $9,733  $43,514,125  $6,040,961  $72,692,092  $(10,537,600) $111,719,251 

  

Common stock at

Par value $0.001

  

Additional

paid-in

  Statutory  Retained  

Accumulated

other

comprehensive

  

Total

stockholders’

 
  Shares  Amount  capital  reserve  Earnings  Income (loss)  equity 
                      
Balance at December 31 2021*  1,590,576  $1,591  $2,363,842  $5,067,243  $54,610,164  $2,265,168  $64,308,008 
                             
Shares issued cashless for warrants  76,701   76   (76)  -   -   -   - 
Net income  -   -   -   -   8,782,742   -   8,782,742 
Foreign currency translation adjustment  -   -   -   -   -   (7,597,937)  (7,597,937)
                             
Balance at September 30, 2022  1,667,277  $1,667  $2,363,766  $5,067,243  $63,392,906  $(5,332,769) $65,492,813 

  

Common stock at

Par value $0.001

  

Additional

paid-in

  Statutory  Retained  

Accumulated

other

comprehensive

  

Total

stockholders’

 
  Shares  Amount  capital  reserve  Earnings  loss  equity 
                      
Balance at December 31 2022*  1,680,248  $1,680  $3,402,178  $6,040,961  $62,366,892  $(2,977,524) $68,834,187 
                             
Shares issued to private placement  8,000,000   8,000   39,992,000   -   -   -   40,000,000 
                             
Fraction shares issued due to reverse stock split  5,362   6   (6)  -   -   -   - 
Exercise of warrants issued to third parties in conjunction with debt issuance in 2021  22,338   22   (22)  -   -   -   - 
Stock issuance for convertible promissory notes payable  25,000   25   119,975   -   -   -   120,000 
Net income  -   -   -   -   10,325,200   -   10,325,200 
Foreign currency translation adjustment  -   -   -   -   -   (7,560,136)  (7,560,136)
                             
Balance at September 30, 2023  9,732,948  $9,733  $43,514,125  $6,040,961  $72,692,092  $(10,537,600) $111,719,251 

*Retrospectively restated for effect of reverse stock split (1-for-20), see Note 10 (2)

*Retrospectively restated for effect of recapitalization, see Note 1

  

Common stock at

Par value $0.001

  

Additional

paid-in

  Statutory  Retained  

Accumulated

other

comprehensive

  

Total

stockholders’

 
  Shares  Amount  capital  reserve  Earnings  (income) loss  equity 
                      
Balance at December 31 2020  31,500,693  $31,501  $1,072,932  $3,062,159  $39,229,282  $957,908  $44,353,782 
                             
Share-based compensation  310,830   311   3,148,795   -       -   3,149,106 
Net income                  8,361,249       8,361,249 
Foreign currency translation adjustment  -   -   -   -   -   (277,199)  (277,199)
                             
Balance at March 31, 2021  31,811,523  $31,812  $4,221,727  $3,062,159  $47,590,531  $680,709  $55,586,938 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-3

 

WETOUCH TECHNOLODY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

      
 

For the three-months ended

March 31,

  

For the nine-months ended

September 30,

 
 2021  2020  2023  2022 
          
Cash flows from operating activities                
Net income $8,361,249  $1,259,494  $10,325,200  $8,782,742 
Adjustments to reconcile net income to cash provided by operating activities                
Bad debts reversal  (76,124)  - 
Depreciation and amortization  374,303   256,926 
Share-based compensation  3,149,106   - 
Gain on asset disposal  (7,611,646)  - 
Depreciation  9,465   12,494 
Amortization of discounts and issuance cost of the notes  24,121   39,774 
(Gain) loss on changes in fair value of common stock purchase warrants liability  124,284   (35,542)
                
Changes in operating assets and liabilities:                
Accounts receivable  8,279,581   180,907   (5,568,912)  (7,451,004)
Amounts due from related parties  83,354   (15,656)  (98)  - 
Inventories  232,797   (22,140)  199,566   (194,529)
Prepaid expenses and other current assets  228,021   (50,807)  335,230   1,168,383 
Accounts payable  1,075,994   1,142,323   202,514   723,723 
Amounts due to related parties  69,615   211,486   (1,665)  7,366 
Income tax payable  676,997   (415,867)  1,171,069   1,208,810 
Accrued expenses and other current liabilities  (350,360)  (136,540)  2,187,200   506,706 
Deferred grants  (725,518)  (57,318)
Net cash provided by operating activities  13,767,369   2,352,808   9,007,974   4,768,923 
                
Cash flows from investing activities                
Proceeds from assets disposal  17,773,202   - 
        
Net cash provided by investing activities  17,773,202   -   -   - 
                
Cash flows from financing activities                
Net cash used in financing activities  -   - 
        
Proceeds from stock issuance of private placement  40,000,000   - 
Repayments of convertible promissory notes payable  (55,000)  - 
Net cash provided by financing activities  39,945,000   - 
                
Effect of changes of foreign exchange rates on cash  (1,025,599)  (273,935)  (6,266,700)  (5,383,354)
Net increase in cash  30,514,972   2,078,873 
Net increase (decrease) in cash  42,686,274   (614,431)
Cash, beginning of period  23,963,861   14,279,797   51,250,505   46,163,704 
Cash, end of period $54,478,833  $16,358,670  $93,936,779  $45,549,273 
Supplemental disclosures of cash flow information        
         $2,938,610  $2,181,273 
Supplemental disclosure of cash flow information        
Cash paid for interest expense $-  $- 
Cash paid for income tax $667,895  $638,654 
Non-cash financing activities        
Cashless stock issuance for convertible promissory notes payable $22,338  $- 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-4

 

WETOUCH TECHNOLODYTECHNOLOGY INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 — BUSINESS DESCRIPTION

Business

Wetouch Technology Inc. (“Wetouch”, or the “Company”), or “we” ), formerly known as Gulf West Investment Properties, Inc., was originally incorporated in August 1992, under the laws of the state of Nevada. Wetouch is primarily engaged in the business of research development, manufacture, distribution of touchscreen displays to customers both in PRC and overseas through its subsidiaries. The touchscreen products, which are manufactured by the Company, are primarily for use in the computer components.

On October 9, 2020, wethe Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Wetouch Holding Group Limited (“BVI Wetouch”) and all the shareholders of BVI Wetouch (each, a “BVI Shareholder” and collectively the “BVI Shareholders”), to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange for the issuance to the BVI Shareholders of an aggregate of 28,000,000 shares (1,400,000 shares post-Reverse Stock Split) of our common stock (the “Reverse Merger”). In the Reverse Merger, each ordinary share of BVI Wetouch was exchanged for 2,800 shares (140 shares post-Reverse Stock Split) of common stock of Wetouch. Immediately after the closing of the Reverse Merger on October 9, 2020, we had a total of 31,396,394 (1,569,820 shares post-Reverse Stock Split) issued and outstanding shares of common stock. As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned subsidiary.

Wetouch Holding Group Limited (“BVI WetouchWetouch”), is a holding company whose only asset, held through a subsidiary, is 100% owner100% of the registered capital of Sichuan Wetouch Technology Co. Ltd. (“Sichuan Wetouch”), a limited liability company organized under the laws of the People’s Republic of China (“China” or “PRC”). Sichuan Wetouch is primarily engaged in the business of research development, manufacture, and distribution of touchscreen displays to customers both in PRC and overseas. The touchscreen products, which are manufactured by the Company, are primarily for use in computer components.

The Reverse Merger was accounted for as a recapitalization effected by a share exchange, wherein BVI Wetouch is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of BVI Wetouch have been brought forward at their book value and no goodwill has been recognized. The number of shares, par value amount, and additional paid-in capital in the prior years are retrospectively adjusted according.accordingly.

Corporate History of BVI Wetouch

Wetouch Holding Group Limited (“BVI Wetouch, whichWetouch”) was incorporated under the laws of British Virgin Islands on August 14, 2020, is2020. It became the sole shareholderholding company of Hong Kong Wetouch Electronics Technology Limited (“Hong Kong Wetouch”) on September 11, 2020.

Hong Kong Wetouch Technology Limited (“HK Wetouch”), was incorporated as a holding company incorporated under the laws of Hong Kong Special Administrative Region (“SAR”), on September 11, 2020 andDecember 3, 2020. On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Vtouch. Due to the fact that Hong Kong Wetouch Technology Limited (“and HK Wetouch”), a holding company incorporatedWetouch are both under the laws ofsame sole stockholder, the acquisition is accounted for under common control.

In June 2021, Hong Kong Special Administrative RegionWetouch completed its dissolution process pursuant to the minutes of its special shareholder meeting.

Sichuan Wetouch Technology Co. Ltd. (“SAR”Sichuan Wetouch”), was formed on December 3, 2020.

May 6, 2011 in the People’s Republic of China (“PRC”) and became Wholly Foreign-Owned Enterprise in PRC on February 23, 2017. On July 19, 2016, Hong Kong Wetouch acquired all the shares of Sichuan Wetouch a PRC company established in Meishan, Sichuan on May 6, 2011. As a result of the acquisition, Sichuan Wetouch became a wholly owned subsidiary of Hong Kongwas 100% held by HK Wetouch.

HK Wetouch was established to own all the outstanding shares of Sichuan Vtouch. which was incorporated onOn December 30, 2020, in Chengdu, Sichuan, under the laws of PRC. On March 12, 2021, BVI Wetouch acquired all the outstanding shares of HK Wetouch. As a result of the acquisition, HK Wetouch and Sichuan Vtouch became our indirect wholly-owned subsidiaries.

Sichuan Vouch Technology Co., Ltd. (“Sichuan Vtouch”) was incorporated in Chengdu, Sichuan, under the laws of the People’s Republic of China in orderChina.

In March 2021, pursuant to takelocal PRC government guidelines on local environmental issues and the national overall plan, Sichuan Wetouch was under the government directed relocation order. Sichuan Vtouch took over the operating business of Sichuan Wetouch, with HK Wetouch as sole shareholder.Wetouch.

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On March 30, 2023, an independent third party acquired all shares of Sichuan Wetouch in a nominal amount.

As a result of the above restructuring, HK Wetouch became the sole shareholder of Sichuan Vtouch.

The following diagram illustrates our current corporate structure:

A diagram of a company

Description automatically generated

Note 2 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the United States Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of December 31, 20202022 was derived from the audited consolidated financial statements of Wetouch. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2020,2022, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended.

In the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of March 31, 2021,September 30, 2023, the results of operations and cash flows for the three-monthnine-month periods ended March 31, 2021September 30, 2023 and 20202022 have been made. However, the results of operations included in such financial statements may not necessarynecessarily be indicative of annual results.

 

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Use of Estimates

The preparation of condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

On an ongoing basis, management evaluates the Company’s estimates, including those related to the bad debt allowance, fair values of financial instruments, intangible assets and property and equipment, income taxes, and contingent liabilities, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Significant Accounting Policies

For a detailed discussion about Wetouch’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in Wetouch’s consolidated financial statements included in Company’s 20202022 audited consolidated financial statements. During the three-monthnine-month periods ended March 31, 2021,September 30, 2023, there were no significant changes made to Wetouch significant accounting policies.

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NOTE-3- ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:

SCHEDULE OF ACCOUNTS RECEIVABLE

 March 31, 2021  December 31 2020  September 30,
2023
  December 31,
2022
 
Accounts receivable $4,502,711  $12,002,454  $13,931,782  $9,057,741 
Allowance for doubtful accounts  -   (75,619)  -   - 
Accounts receivable, net $4,502,711  $11,926,835  $13,931,782  $9,057,741 

The Company’s accounts receivable primarily includes balance due from customers when the Company’s products are sold and delivered to customers.

NOTE-4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS

  September 30,
2023
  December 31,
2022
 
Advance to suppliers $325,852  $333,920 
VAT input credits  -   355,482 
Issue cost related to convertible promissory notes  69,566   81,614 
Prepayment for land use right (i)  537,998   569,105 
Security deposit (ii)  53,865   56,979 
Others receivable (iii)  55,989   53,520 
Prepaid expenses and other current assets $1,043,270  $1,450,620 

(i)On July 23, 2021, Sichuan Vtouch entered into a contract with Chengdu Wenjiang District Planning and Natural Resources Bureau for purchasing a land use right of 131,010 square feet with a consideration of RMB3,925,233 (equivalent to $537,998) for the new facility. The Company made a full prepayment by November 18, 2021. Upon a certificate of land use right issued by the local government, which is estimated to be obtained by the fourth quarter of 2023, the Company will reclassify this prepayment to intangible assets accordingly.

 

(ii)On July 28, 2021, Sichuan Vtouch made a security deposit of RMB393,000 (equivalent to $53,865) to Chengdu Cross-Strait Science and Technology Industry Development Park Management Committee to obtain a construction license for new facility. This deposit will be refunded upon the issuance of the construction license by the end of 2023.

(iii)Other receivables are mainly employee advances, and prepaid expenses.

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NOTE 4 — 5— PROPERTY, PLANT AND EQUIPMENT, NET

SCHEDULE OF PROPERTY , PLANT AND EQUIPMENT

  September 30, 2023  December 31, 2022 
Buildings $11,804  $12,487 
Vehicles  40,132   42,453 
Construction in progress  10,288,183   10,883,051 
Subtotal  10,340,119   10,937,991 
Less: accumulated depreciation  (20,439)  (14,381)
Property, plant and equipment, net $10,319,680  $10,923,610 

Property, plant and equipment, net, consists of the following:

  March 31, 2021  December 31, 2020 
Buildings $-  $10,330,767 
Machinery, equipment and furniture  -   5,830,470 
Subtotal  -   16,161,237 
Less: accumulated depreciation  -   (6,670,042)
Property, plant and equipment, net $-  $9,491,195 

Depreciation expense was $260,943$2,294 and $242,464$2,340 for the three-month period ended March 31, 2021September 30, 2023 and 2020, respectively.2022, respectively, and $9,465 and $12,494 for the nine-month period ended September 30, 2023 and 2022, respectively

Pursuant to local PRC government guidelines on local environment issues and the national overall plan, Sichuan Wetouch is under the government directed relocation order to relocate no later than December 31, 2021 and got compensatedreceived compensation accordingly. On March 18, 2021, pursuant to the agreement with the local government and an appraisal report issued by a mutual agreed appraiser, Sichuan Wetouch received a compensation of RMB115.2RMB115.2 million ($17.815.8 million) (“Compensation Funds”) for the withdrawal of the right to use of state-owned land and the demolition of all buildings, facilities, equipment and all other appurtenances on the land. During the three-month period ended March 31, 2021, the Company recorded a gain of $7,611,646 for the asset disposal including intangible assets.

On March 16, 2021, in order to minimize interruption of our business, Sichuan Vtouch entered into a leasing agreement with Sichuan Renshou Shigao Tianfu Investment Co., Ltd. (later renamed as Meishan Huantian Industrial Co., Ltd.), a limited company owned by the local government, to lease the property, and all buildings, facilities and equipment thereon (“Demised Properties) of Sichuan Wetouch, commencing from April 1, 2021 until December 31, 2021 at a monthly rent of RMB300,000RMB300,000 ($46,284)41,372), and renewed on December 31, 2021 at a monthly rent of RMB 400,000 ($52,825) from January 1, 2022 till October 31, 2024 for the use of the Demised Properties.Properties.

NOTE 5 – INTANGIBLE ASSETS, NET

Intangible assets, net mainly consist of the following:

  March 31, 2021  

December 31, 2020

 
Land use rights $-  $1,016,215 
Patents  -   417,919 
Subtotal  -   1,434,134 
Less: accumulated amortization for patents  -   (310,393)
Accumulated amortization for land use right  -   (149,045)
Subtotal  -   (459,438)
Intangible assets, net $-  $974,696 

Amortization expense was $113,360 and $14,523 for the three-month period ended March 31, 2021 and 2020, respectively. The Company accelerated the amortization expense for the three-month period ended March 31, 2021 due to the relocation pursuit to the Compensation Fund agreement with the local government. See Note 4. As the Company plans to deregister Sichuan Wetouch and the newly set up Sichuan Vtouch will use new techniques with new equipment, the Company estimates no remaining useful life for the existing patents.

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NOTE 6 – RELATED PARTY TRANSACTIONS

The related party transactions are summarized as follows:

  Three-Month Period Ended March 31, 
 2021  2020 
Revenues resulting from related parties:        
Sales to Chengdu Wetouch Technology Co., Ltd (“Chengdu Wetouch”)  10,433   - 
Sales to Meishan Vtouch Electronics Technology Co., Ltd. (Meishan Wetouch)  88,947   - 
  $97,380  $- 

The Company sells capacitive touchscreens to Chengdu Wetouch and Meishan Wetouch from time to time. There are no written agreements between the Company and Meishan Wetouch. Mr. Guangde Cai, Chairman and director of the Company and our indirect majority shareholder, owns 94% and 95% of Chengdu Wetouch and Meishan Wetouch, respectively.

Amounts due from related parties are as follows:

Amounts due

from related

parties

 Relationship 

March 31,

2021

  

December 31,

2020

  Note
Vision Touch Technology AG 100% owned by Mr. Yong Yang, Sales Director of Sichuan Wetouch  -   76,619  Operating expense paid on behalf of the related party/Company
Total   $-  $76,619   

Amounts due to a related partiesparty are as follows:follows:

SCHEDULE OF RELATED PARTY TRANSACTIONS

  Relationship 

March 31,

2021

  

December 31,

2020

  Note
Chengdu Wetouch Technology Co., Ltd (“Chengdu Wetouch”) 94% owned by Mr. Guangde Cai & 2% by Mr. Shengyong Li $129,285  $134,616  Operating expense paid on behalf of the Company

Meishan Vtouch Electronics

Technology Co., Ltd.

 95% owned by Mr. Guangde Cai and 5% by Chengdu Wetouch  77,155   68,402  Operating expense paid on behalf of the Company
Chengdu Vtouch Intelligence Science & Technology Co., Ltd. 100% owned by HK Vtouch Holding Group Co., Ltd.  193,219   -  Operating expenses paid on behalf of the Company
Mr. Guangde Cai Chairman and CEO of the Company  228,945   326,042  Payable to employee
Total   $628,604  $529,060   
  Relationship September 30,
2023
  December 31,
2022
  Note
Mr. Zongyi Lian President and CEO of the Company  -   1,665  Payable to employee
Total   $-  $1,665   

NOTE 7 - INCOME TAXES

Wetouch

Wetouch Technology Inc. is subject to a tax rate of 21% per beginning 2018, and files a U.S. federal income tax return.

BVI Wetouch

Under the current laws of the British Virgin Islands, BVI Wetouch, subsidiaries of Wetouch, is not subject to tax on its income or capital gains. In addition, no British Virgin Islands withholding tax will be imposed upon the payment of dividends by the Company to its shareholders.

 

Hong Kong

HK Wetouch is incorporated in Hong Kong and is subject to profit taxes in Hong Kong at a progressive rate of 16.5%16.5%.

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PRC

PRC

Sichuan Wetouch and Sichuan Vtouch files income tax returns in the PRC. Effective from January 1, 2008, the PRC statutory income tax rate is 25% according to the Corporate Income Tax (“CIT”) Law which was passed by the National People’s Congress on March 16, 2007.

Under PRC CIT Law, domestic enterprises and Foreign Investment Enterprises (“FIEs”) are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on a case-by-case basis by local government as preferential tax treatment to High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for their HNTE status every three years. Pursuant to an approval from the local tax authority in October 2017, Sichuan Wetouch became a qualified enterprise located in the western region of the PRC, which entitled it to a preferential income tax rate of 15%15% from October 11, 2017 to October 11, 2020.

On October 21, 2020, Sichuan Wetouch was granted on a case-by-case basis by Sichuan Provincial government as preferential tax treatment High and New Technology Enterprises (“HNTEs”), entitled to a reduced income tax rate of 15% beginning October 21, 2020 tilluntil October 20, 2023.2023.

On March 30, 2023 an independent third party acquired all shares of Sichuan Wetouch.

.

Sichuan Vtouch is entitled to 25%25% of income tax rate.

The effective income tax rates for the three-monthnine-month periods ended March 31, 2021September 30, 2023 and 20202022 were 13.9%28.5% and 15.0%27.9%, respectively. The effective income tax rate for the three-month period ended March 31, 2021 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Wetouch’s preferential income tax rate.

The estimated effective income tax rate for the year ended December 31, 20212023 would be similar to actual effective tax rate of the three-monthnine-month periods ended March 31, 2021.September 30, 2023.

NOTE 8- 8— ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

SCHEDULE OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 March 31, 2021 December 31, 2020  

September 30,
2023

  

December 31,
2022

 
Advance from customers $121,791  $9,493  $532,069  $397,886 
Accrued payroll and employee benefits  22,182   105,801   82,015   89,359 
Other tax payable (receivable) (i)  -   325,719 
Others (ii)  42,063   62,442 
Accrued interest expenses  209,397   122,135 
Accrued underwriter fees (i)  1,200,000   - 
Other tax payables (ii)  595,183   261 
Other payable to a former shareholder (iii)  -   191,180 
Accrued professional fees  332,313   - 
Others (iv)  111,074   153,803 
Accrued expenses and other current liabilities $186,036  $503,455  $3,062,051  $944,624 

(i)On March 18, 2023, the Company entered into a private placement consent agreement with Representatives of the private placement taken place on January 19, 2023 (see Note 10) on the underwriting fees of US$1.2 million, payable only on the completion of the underwriting offering.

(ii)Other tax payables are mainly value added tax payable.

(iii)Other payable to a former shareholder was paid in March 2023.

(iv)Others mainly represent accrued employee reimbursement payable and other accrued miscellaneous operating expenses.

 

(i) Other tax payables

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NOTE 9 – CONVERTIBLE PROMISSORY NOTES PAYABLE

a) Convertible promissory notes

In October, November, and December 2021, the Company, issued seven (7) convertible promissory notes of US$2,250,000 aggregate principal amount, due in one year (the ‘Notes’) with issuance price discounted 90.0%. The Notes bear interest at a rate of 8.0% per annum, payable in one year and will mature on October 27, November 5, November 16, November 29 and December 2 of 2022. Net proceeds after debt issuance costs and debt discount were approximately US$1,793,000. Debt issuance costs in the amount of US$162,000 are mainly value added tax payable (receivable).

(ii) Others mainly represent accrued employee reimbursement payablerecorded as deferred charges and other accrued miscellaneous operating expenses.

NOTE 9- DEFERRED GRANTS

On January 14, 2013 and January 27, 2014, Sichuan Wetouch received RMB11.2 million (equivalent to US$1.8 million) and RMB4.8 million (equivalent to US$0.8 million) government subsidies, respectively, from Sichuan Provincial Government in supporting the initial set-up and construction of production facility. The Company completed the construction of the plant in June 2013 and there were no other unfulfilled conditions and/or other contingencies attaching to government assistance which has been recognized as income.

Since the funding is related to the construction of long-term assets, the amounts were recognized as government grant, which is included in deferred grantsthe other current assets on the consolidated balance sheets,sheet. The debt discount and debt issuance costs are amortized into interest expense using the effective interest method over the terms of the Notes.

The details of convertible notes are as follows:

Unless the Notes are converted, the principal amounts of the Notes, and accrued interest at the rate of 8% per annum, are payable on the one-year anniversary of the issuance of the Notes (the “Maturity Date”). If the Company fails to satisfy its loan obligation by the Maturity Date, the default interest rate will be recognized as other income16%.

The Lenders have the right to convert any or all of the principal and accrued interest on the Notes into shares of common stock of the Company on the earlier of (i) 180 calendar days after the issuance date of the Notes or (ii) the closing of a listing for trading of the common stock of the Company on a national securities exchange offering resulting in gross proceeds to the Company of $15,000,000 or more (an “Uplist Offering”). If the Company closes an Uplist Offering on or before the 180th calendar date after the issuance date of the Notes, the conversion price shall be 70% of the per share offering price in the consolidated statementsUplist Offering; otherwise, the conversion price is $15.0 per share.

Subject to customary exceptions, if the Company issues shares or any securities convertible into shares of comprehensive income (loss) overcommon stock at an effective price per share lower than the periodsconversion price of the Notes, the conversion rate of the Notes shall be reduced to such lower price.

Until the Notes are either paid or converted in their entirety, the Company agreed with the Lenders not to sell any securities convertible into shares of common stock of the Company (i) at a conversion price that is based on the trading price of the stock or (ii) with a conversion price that is subject to being reset at a future date or upon an event directly or indirectly related to the business of the Company or the market for the common stock. The Company also agreed to not issue securities at a future determined price.

The Lenders have the right to require the Company to repay the Notes if the Company receives cash proceeds, including proceeds from customers and the issuance of equity (including in the proportions in which depreciation expense on the long-term assets is recognized.

During the three-month period ended March 31, 2021,Uplist Offering). If the Company recognizedprepays the remaining balance of deferred grant as income dueNotes prior to the government directed relocation order disclosed in Note 4.Maturity Date, the Company shall pay a 10% prepayment penalty.

 

F-9F-10

 

The following table summarizes the outstanding promissory notes as of September 30, 2023 and December 31, 2022 (dollars in thousands):

SUMMARY OF OUTSTANDING PROMISSORY NOTES

     September 30, 2023  December 31, 2022 
  

Interest

rate

  Principal Amount  Carrying Amount  Principal Amount  Carrying Amount 
Convertible Note - Talos Victory (Note 9 (b))  8% $-  $-  $-   - 
Convertible Note - Mast Hill (Note 9 (b))  8%  725,000   679,402   740,000   635,535 
Convertible Note - First Fire (Note 9 (b))  8%  156,250   146,654   181,250   156,594 
Convertible Note - LGH Note 9 (b))  8%  202,500   199,438   207,500   188,987 
Convertible Note - Fourth Man (Note 9 (b))  8%  152,000   137,882   157,000   128,703 
Convertible Note - Jeffery Street Note 9 (b))  8%  165,000   145,865   170,000   142,554 
Convertible Note - Blue Lake Note 9 (b))Total  8%  -   -   -   - 
Total     $1,400,750  $1,309,241  $1,455,750  $1,252,373 
                     
Amortization of discounts for the nine months ended September 30, 2023          (74,886)        
Convertible promissory notes payable as of September 30, 2023         $1,234,355         

From December 28, 2022 to April 6, 2023, the remaining five (5) lenders and the Company entered into an amendment to the Note (“Amendment to Promissory Note”) extending maturity date for an additional 6 months.

From August 29 to September 9, 2023, the remaining lenders and the Company entered into an amendment to the Note (“Amendment to Promissory Note”) that the Company’s ordinary shares on the Nasdaq Capital Market (the “Uplist”), the Company shall within three (3) business days after the Uplist, pay to the Holders amounts equal to 105% of the total outstanding balance of the Convertible Debenture.

During the nine-month period ended September 30, 2023, principal and default charges totaling $1,200,000 was converted into 25,000 shares of common stock of the Company.

For the nine-month period ended September 30, 2023 and 2022, the Company recognized interest expenses of the Notes in the amount of US$211,383 and US$172,255, respectively.

*The Company prepaid $10,000 legal deposit for each note till the repayment of the notes.

b) Warrants

Accounting for Warrants

In connection with the issuance of a convertible promissory notes (see Note 11 (a) in October, November and December, 2021, the Company also issued seven (7) three-year warrant (the “Warrant”) to purchase an aggregate of 90,000 shares of the Company’s common stock (the “Warrant Shares”).

The Warrants issued to the Lenders granted each of the Lenders the right to purchase up to 10,000 shares of common stock of the Company at an exercise price of $25 per share. However, if the Company closes an Uplist Offering on or before the 180th calendar date after the issuance date of the Warrants, then the exercise price shall be 125% of the offering price of a share in the Uplist Offering. If the adjusted exercise price as a result of the Uplist Offering is less than $25per share, then the number of shares for which the Warrants are exercisable shall be increased such that the total exercise price, after taking into account the decrease in the per share exercise price, shall be equal to the total exercise price prior to such adjustment.

F-11

The Lenders have the right to exercise the Warrants on a cashless basis if the highest traded price of a share of common stock of the Company during the 150 trading days prior to exercise of the Warrants exceeds the exercise price, unless there is an effective registration statement of the Company which covers the resale of the Lenders.

If the Company issues shares or any securities convertible into shares at an effective price per share lower than the exercise price of the Warrants, the exercise price of the Warrants shall be reduced to such lower price, subject to customary exceptions.

The Lenders may not convert the Notes or exercise the Warrants if such conversion or exercise will result in each of the Lenders, together with any affiliates, beneficially owning in excess of 4.9% of the Company’s outstanding common stock immediately after giving effect to such exercise unless the Lenders notify the Company at least 61 days prior to such exercise.

On January 17, 2022, we closed a private offering of ordinary shares and warrants to purchase ordinary shares. A total of 137,500 ordinary shares (the “Shares”) were issued to a total of five (5) investors (the “Investors”) at a subscription price of $16.0 per share, for total subscription proceeds of $2,200,000. In addition, for each share subscribed for by the Investors, we issued one (1) warrant to purchase one (1) ordinary share at an exercise price of $17.6 per share, exercisable for a period of twenty-four (24) months (the “Warrants”). We have agreed to register the Investors’ re-sale of the Shares by way of a prospectus supplement to our currently effective unallocated shelf registration statement on Form F-3, (SEC File No. 333-267116). The offer and sale of the Shares and the Warrants was exempt under Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”). We engaged in no general solicitation or advertising with regard to the offering and the offering was made solely to “Accredited Investors” as defined in Rule 501 of Regulation D under the Securities Act.

During the year ended December 31, 2022, three lenders exercised cashless for 14,233 warrant shares.

During the nine-month period ended September 30, 2023, two lenders exercised cashless for 22,338 warrant shares.

The fair values of these warrants as of September 30, 2023 were calculated using the Black-Scholes option-pricing model with the following assumptions:

SCHEDULE OF FAIR VALUE OF WARRANTS

        September 30, 2023 
  Volatility (%)  Expected dividends yield (%)  Weighted average expected life (year)  Risk-free interest rate (%) (per annum)  Common stock purchase warrants liability as of December 31, 2022(US$)  Changes of fair value of common stock purchase warrants liability
(+ (loss)/(- (gain)(US$)
  Common stock purchase warrants liability as of September 30, 2023 (US$) 
Convertible Note - Talos Victory (Note 9 (a))  522.6% $0.0% $1.1   5.46%  14,803   28,758   43,561 
Convertible Note - Mast Hill (Note 9 (a))  522.6%  0.0%  -   5.46%  101,293   (101,293)  - 
Convertible Note - First Fire (Note 9 (a))  522.6%  0.0%  1.1   5.46%  33,919   65,246   99,165 
Convertible Note - LGH Note 9 (a))  522.6%  0.0%  1.2   5.46%  34,028   65,204   99,232 
Convertible Note - Fourth Man (Note 9 (ab))  522.6%  0.0%  1.2   5.46%  14,398   27,524   41,922 
Convertible Note - Jeffery Street Note 9 (a))  522.6%  0.0%  1.2   5.46%  34,134   (7,697)  26,437 
Convertible Note - Blue Lake Note 9 (a))  522.6%  0.0%  1.2   5.46%  24,382   46,542   70,924 
Total              Total   256,957   124,284   381,241 

F-12

(c) Registration Rights Agreements

Pursuant to the terms of the Registration Rights Agreement dated as of contract date of each convertible promissory note, 2021, executed between the Company and Lender, the Registration Rights Agreement dated as of each contract date, executed between the Company and Lenders, the Company agreed to file a registration statement with the Securities and Exchange Commission to register the shares of common stock underlying the Notes and the shares issuable upon exercise of the Warrants within sixty days from the date of each Registration Rights Agreement. The Company also granted the Lenders piggyback registration rights on such shares pursuant to the Purchase Agreements.

NOTE 10— SHAREHOLDERS’ EQUITY

1) Ordinary Shares

The Company’s authorized number of ordinary shares was 15,000,000 shares with par value of $0.001.

On December 22, 2020, the Company issued 5,181 shares of common stock to The Crone Law Group, P.C. or its designees for legal services (see Note 11).

On January 1, 2021, the Company issued an aggregate of 15,541 shares to a third party service provider for consulting services that had been rendered.

On April 14, April 27, 2022 and September 1, 2022, the Company issued cashless warrant shares of 5,777, 5,599 and 2,857 to three lenders respectively. (see Note 9 (b)).

During the year ended December 31, 2022, the Company issued 6,211 shares to a third party for warrant exercise (see Note 11).

During the year ended December 31, 2022, the Company issued 69,228 shares of common for the conversion of convertible promissory note payable (see note 9 (a)).

On January 19, 2023, the Company sold an aggregate of 8,000,000 shares of the common stock to buyers of the Private Placement for an aggregate purchase price of $40,000,000, or $5.00 per share. On January 20, 2023, the Company received net proceeds of $40 million accordingly.

During nine-month ended September 30, 2023, the Company issued 25,000 shares of common stock for the conversion of convertible promissory note payable (see note 9 (a)).

During the nine-month ended September 30, 2023, the Company issued 22,338 shares to two third party for warrant exercise (see Note 9(b)).

As of September 30, 2023, the Company had 9,732,948 issued and outstanding shares.

2) Reverse Stock Split

On February 17, 2023, the Company’s board of directors authorized a reverse stock split with a ratio of not less than one to five (1:5) and not more than one to eighty (1:80), with the exact amount and the timing of the reverse stock split to be as determined by the Chairman of the Board. Upon such reverse stock split becoming effective, the number of authorized shares of the common stock of the Company will also be decreased in the same ratio. Pursuant to Nevada Revised Statutes Section 78.209, the reverse stock split does not have to be approved by the shareholders of the Company.

F-13

On July 16, 2023, the Company’s board of directors approved a reverse stock split of the Company’s common stock at a ratio of 1-for-20. On July 16, 2023, the Company filed a certificate of change (with an effective date of July 16, 2023) with the Nevada Secretary of State pursuant to Nevada Revised Statutes 78.209 to effectuate a 1-for-20 reverse stock split of its outstanding common stock. On September 11, 2023, the Company received notice from FINRA/OTC Corporate Actions the reverse split would take effect at the open of business on September 12, 2023, and the reverse stock that split took effect on that date. All share information included in this Form 10-Q has been reflected as if the reverse stock split occurred as of the earliest period presented.

NOTE 10- 11- SHARE BASED COMPENSATION

AsThe Company applied ASC 718 and related interpretations in accounting for measuring the cost of March 31, 2021,share-based compensation over the Company had 841,440 warrants outstanding with i) weighted average exercise price of $0.01; ii) weighted average remaining contractual life of 4.7 years; and iii) aggregate intrinsicperiod during which the consultants are required to provide services in exchange for the issued shares. The fair value of $3.4 million.above award was estimated at the grant date using Black-Scholes model for pricing the share compensation expenses.

On January 1, 2021,December 22, 2020, the Board of Directors of the Company authorized the issuance of an aggregate of 310,830 5,181shares and 631,08010,518 warrants to a third party service providerThe Crone Law Group, P.C. or its designees for consultinglegal services that had been rendered. The five-year warrants are exercisable at one cent per share.

The Company awards common stock and stock options to employees, consultants, and directors as compensation for their services, and accounts for its stock option awards to employees, consultants, and directors pursuant to the provisions of ASC 718, Stock Compensation. The fair value of each option award is estimated on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period.

The 310,830 shares of common stock and 631,080 warrants5,181 were vested on January 1, 2021December 22, 2020 and no warrants6,211 warrant shares were exercised.exercised on September 21, 2022 and had 4,307 warrant shares remaining for the Crone law Group, P.C. or its designees for legal services. The fair value of above award was estimated at the grant date using Black-Scholes model for pricing the share compensation expenses. The fair value of the Black-Scholes model includes the following assumptions: expected life of 2.5 years, expected dividend rate of 0%0%, volatility of 51.3%43.5% and an average interest rate of 0.12%0.11%.

For the three-month periods ended March 31,On January 1, 2021, the Board of Directors of the Company recognized relevant share-based compensation expenseauthorized the issuance of $1,041,281 for the vestedan aggregate of 15,541 shares and $2,107,82531,554 warrants to a third party service provider for consulting services that had been rendered. The five-year warrants are exercisable at one cent per share.

The 15,541 shares of common stock and 31,554 warrants were vested on January 1, 2021.

The fair value of above award was estimated at the grant date using Black-Scholes model for pricing the share compensation expenses. The fair value of the Black-Scholes model includes the following assumptions: expected life of 2.5 years, expected dividend rate of 0%, volatility of 51.3% and an average interest rate of 0.12%.

As of September 30, 2023, the Company had 35,861warrants respectively.outstanding related to above mentioned services with i) weighted average exercise price of $0.2; ii) weighted average remaining contractual life of 0.2 years; and iii) aggregate intrinsic value of $0.4 million.

NOTE 11- 12- RISKS AND UNCERTAINTIES

Credit Risk – The carrying amount of accounts receivable included in the balance sheet represents the Company’s exposure to credit risk in relation to its financial assets. No other financial asset carries a significant exposure to credit risk. The Company performs ongoing credit evaluations of each customer’s financial condition. The Company maintains allowances for doubtful accounts and such allowances in the aggregate have not exceeded management’s estimates.

The Company has its cash in bank deposits primarily at state owned banks located in the PRC. Historically, deposits in PRC banks have been secured due to the state policy of protecting depositors’ interests. The PRC promulgated a Bankruptcy Law in August 2006, effective June 1, 2007, which contains provisions for the implementation of measures for the bankruptcy of PRC banks. The bank deposits with financial institutions in the PRC are insured by the government authority for up to RMB500,000.RMB500,000.

Interest Rate Risk – The Company is exposed to the risk arising from changing interest rates, which may affect the ability of repayment of existing debts and viability of securing future debt instruments within the PRC.

F-14

 

Currency Risk - A majority of the Company’s revenue and expense transactions are denominated in RMB and a significant portion of the Company’s assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.

The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:

March 31, 2021December 31, 2020
Year-end spot rateUS$1=RMB 6.4817US$1=RMB 6.5250
Average rateUS$1=RMB 6.5518US$1=RMB 6.9042

And average rate for March 31, 2020 is US$=RMB6.9786.

F-10

Concentrations - The Company sells its products primarily through direct customers in the PRC and to some extent, the overseas customers in European countries and East Asia such as South Korea and Taiwan (Refer to Note 12). Sales to customers individually exceeded 10% of the Company’s revenues for the three-month periods ended March 31, 2021 and 2020, are as follows:Taiwan.

For the three-month periods ended March 31, 2021September 30, 2023 and 2020,2022, five customers accounted for 18.7%20.5%, 17.9%17.4%, 15.2%15.7%, 11.8%15.6% and 11.1%12.3%, and five customers accounted for 21.9%, 16.3%, 15.0%, 13.4% and 12.9%, respectively, of the Company’s revenue.

For the nine-month periods ended September 30, 2023 and 2022, five customers accounted for 22.0%, 16.1%, 15.9%, 14.4%, and 11.6%, and six customers accounted for 17.9%20.5%, 16.6%15.9%, 15.6%15.6%, 14.3%14.5%, 14.1%12.3% and 11.5%10.2%, respectively, of the Company’s revenue.

And the Company’s top ten customers aggregately accounted for 99.2%99.8% and 99.4 99.1% of the total revenue for the three-month periods ended March 31, 2021September 30, 2023 and 2020, respectively.2022, and 99.6% and 99.2% for the nine-month periods ended September 30, 2023 and 2022.

As of March 31, 2021 and 2020, fiveSeptember 30, 2023, two customers accounted for 22.3%26.7%, 22.1%, 16.1%, 14.0% and 11.4%14.1% of the total accounts receivable balance, respectively.

The Company purchases its raw materials through various suppliers. Raw material purchases from these suppliers which individually exceeded 10% of the Company’s total raw material purchases, accounted for approximately 38.1% (three23.0% (two suppliers) and 26.4% (two supplier)47.7% (four suppliers) for the three-month periods, respectively, 11.9% (one supplier) and 47.2% (four suppliers) for the nine-month periods ended March 31, 2020September 30, 2023 and 2021,2022, respectively.

NOTE 1 213COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company is a partyand its affiliates are parties to various legal actions arising in the ordinary course of business. TheAlthough Sichuan Wetouch and Hong Kong Wetouch, the previous subsidiaries of the Company, accrues costs associatedand our former Chairman and director Mr. Guangde Cai were named as defendants in several litigation matters, as of the date of this report, all such matters have been settled and Sichuan Wetouch, Hong Kong Wetouch and Mr. Guangde Cai were unconditionally and fully discharged and released therefrom. Accordingly, there are no pending material legal proceedings against the Company.

Please also refer to NOTE 13 - commitments and of our 2023 10K-Annual report for year ending December 31, 2022 filed on April 17, 2023.

Capital Expenditure Commitment

On December 20, 2021, the Company entered into a contract with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.Shenzhen Municipal Haoyutuo Decoration & Cleaning Engineering Company Limited to purchase a facility decoration contract of RMB20.0 million (equivalent to US$3.1 million). As of March 31, 2021, there were no legal proceedings.

Capital expenditure commitment

TheSeptember 30, 2023, the Company does not have any capital commitmentshas prepaid RMB15.0 million (equivalent to US$2.1 million) and recorded as construction in progress (see Note 5) and had a remaining balance of March 31, 2021.

NOTE 13 — REVENUES

  For the Three-Month Periods Ended, 
  2021  2020 
Sales in PRC $7,155,877  $2,317,292 
Sales in Overseas        
—Republic of China (ROC, or Taiwan)  1,977,038   563,428 
-South Korea  1,574,315   628,372 
-Others  6,074   - 
Sub-total  3,557,427   

1,191,800

 
Total revenues $10,713,304  $3,509,092 

DueRMB5.0 million (equivalent to US$0.7 million) to be paid by the COVID-19 pandemic, the Company’s subsidiary Sichuan Wetouch was temporarily shut down from early February 2020 to early March 2020 in accordance with the requirementend of the local governments. The Company’s business was negatively impacted and generated lower revenue and net income during the period from February to April 2020.2023.

 

F-11F-15

 

NOTE 14 — REVENUES

The Company’s geographical revenue information is set forth below:

SCHEDULE OF GEOGRAPHICAL REVENUE INFORMATION

             
  

Three-Month Period Ended

September 30,

  

Nine-Month Period Ended

September 30,

 
  2023  2022  2023  2022 
  US$  US$  US$  US$ 
Sales in PRC $7,423,695  $8,159,260  $25,819,405  $24,421,569 
Sales in Overseas                
-Republic of China (ROC, or Taiwan)  1,943,123   1,851,599   5,962,410   5,708,133 
-South Korea  1,742,589   1,578,002   5,387,021   5,144,829 
-Others  14,199   34,157   162,662   95,968 
Sub-total  3,699,910   3,463,758   11,512,093   10,948,930 
Total Revenue $11,123,605  $11,623,018  $37,331,498  $35,370,499 

NOTE 15 — SUBSEQUENT EVENTS

On September 7, 2023, Wetouch Technology Inc. (the “Company”) filed a Certificate of Change Pursuant to Nevada Revised Statutes Section 78.209 with the Secretary of State of the State of Nevada to affect a 1-for-20 reverse stock split (the “Reverse Stock Split”). On September 11, 2023, the Financial Industry Regulatory Authority (“FINRA”) notified us that the Reverse Stock Split will become effective on the OTCQB marketplace of OTC Markets on September 12, 2023 (the “Effective Date”). At the opening of business on the Effective Date, the Company’s common stock began trading on a split-adjusted basis. In connection with the Reverse Stock Split, the CUSIP number for the common stock will change to 961881208. The Company’s shares of common stock will continue to trade on the OTCQB marketplace under the symbol “WETHD” for a period of 20 business days, and thereafter, the symbol will return to “WETH”. Pursuant to Nevada Revised Statutes Section 78.209, the reverse stock split does not have to be approved by the shareholders of the Company. Fractional shares resulting from the Reverse Stock Split will be rounded up to the nearest whole number.

Prior to the effective date of the Certificate of Change, the Company was authorized to issue 300,000,000 shares of common stock. As a result of the Reverse Stock Split, the Company is authorized to issue 15,000,000 shares of common stock. As of September 8, 2023 (immediately prior to the Effective Date of the Reverse Stock Split), there were 194,551,716 shares of common stock outstanding. As a result of the Reverse Stock Split, there are approximately 9,727,586 shares of common stock outstanding (subject to adjustment due to the effect of rounding fractional shares into whole shares). The Reverse Stock Split will not have any effect on the stated par value of the common stock.

Each shareholder’s percentage ownership interest in the Company and proportional voting power remains virtually unchanged as a result of the Reverse Stock Split, except for minor changes and adjustments that will result from rounding fractional shares into whole shares. The rights and privileges of the holders of shares of common stock will be substantially unaffected by the Reverse Stock Split. All options, warrants and convertible securities of the Company outstanding immediately prior to the Reverse Stock Split (to the extent they don’t provide otherwise) will be appropriately adjusted by dividing the number of shares of common stock into which the options, warrants and convertible securities are exercisable or convertible by 20 and multiplying the exercise or conversion price thereof by 20, as a result of the Reverse Stock Split.

F-16

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto. The management’s discussion and analysis contain forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our Annual Report filed with the SEC on March 24, 2021,April 14, 2023, as updated in subsequent filings we have made with the SEC that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

Basis of Presentation

The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.

Recent DevelopmentsOverview

Hong Kong Wetouch Electronics Technology Limited, a limited company organized under the laws of Hong Kong (“HK Wetouch”), an affiliate of Guangde Cai, our Chairman and Director, was incorporated on December 3, 2020 under the laws of Hong Kong. HK Wetouch was established to own all the outstanding shares of Sichuan Wetouch Technology Co., Ltd., which was incorporated on December 30, 2020 (“Sichuan Wetouch”) in Chengdu, Sichuan, under the laws of The People’s Republic of China (“PRC”).

On March 12, 2021, BVI Wetouch acquired all the outstanding shares of HK Wetouch from the sole shareholder of HK Wetouch, Guangde Cai, in consideration of the payment of HK$10,000 pursuant to instruments of transfer in accordance with Hong Kong law. As a result of the acquisition, HK Wetouch became a wholly-owned subsidiary of BVI Wetouch. BVI Wetouch owns (i) all the outstanding shares of HK Wetouch, which, in turn, owns all the outstanding shares of Sichuan Wetouch and (ii) all of the outstanding shares of Hong Kong Wetouch Technology Limited, which owns all the shares of Sichaun Vtouch Technology Co., Ltd., a company incorporated under the laws of PRC.

On March 16, 2021, an indirectly wholly-owned operating subsidiary of the Company, Sichuan Wetouch entered into an Agreement of Compensation on Demolition (“Compensation Agreement”) with Sichuan Renshou Shigao Tianfu Investment Co., Ltd, a limited company owned by the local government (Sichuan Renshou”), for the withdrawal of our right to use of state-owned land and the demolition of all buildings, facilities and equipment on such land where we maintain our executive offices, research and development facilities and factories at No.29, Third Main Avenue, Shigao Town, Renshou County, Meishan City, Sichuan, China (the “Property”). The Property, all buildings, facilities, equipment and all other appurtenances on the Property are collectively referred to as “Properties”. The Compensation Agreement was executed and delivered as a result of guidelines (the “Guidelines”) published by the local government of with respect to local environmental issues and a national overall plan on Tianfu New District, Meishan City, Sichuan, PRC. In accordance with the Guidelines, a project named “Chaisang River Ecological Wetland Park” is under construction in the areas where the manufacturing facilities and properties of the Company are located. As a result, Sichuan Wetouch must relocate. In consideration for such relocation, the owner of the buildings on the state-owned land will be compensated.

5

Under the Compensation Agreement, based on an appraisal report issued by a mutually agreed upon third party appraiser, Sichuan Wetouch will receive a compensation of RMB115.2 million (approximately $17.7 million based on an exchange rate of 6.5RMB per US $1.00), including RMB100.2 million ($15.4 million) based upon the appraised value of the Properties plus an extra 15% relocation bonus of RMB15.0 million ($2.3 million).

In order to minimize the interruption of our business, a newly acquired wholly-owned subsidiary of ours in Sichuan, China entered into a Leaseback Agreement with Sichuan Renshou on March 16, 2021. The Leaseback Agreement entitles us to lease back the Properties commencing from April 1, 2021 until December 31, 2021, at a monthly rent of RMB300,000 (approximately $46,154).

On March 18, 2021, Sichuan Wetouch received a total amount of RMB115.2 million (approximately $17.7 million) as the total amount of compensation from Sichuan Renshou.

We are actively searching for an appropriate parcel in Chengdu Medicine City (Technology Park), Wenjiang District, Chengdu for the construction of our new production facilities and office buildings. As of the date of this Current Report, we estimate that our capital needs for this acquisition and construction will be approximately RMB170.0 million (approximately $26.2 million), but there is no assurance that the estimated amount is sufficient to achieve our goals. We may need additional financing for our business development. In addition, we expect that this acquisition and construction will be completed prior to December 31, 2021, but there is no assurance and we may need extended time to achieve our business plan.

Overview

We were originally incorporated under the laws of the state of Nevada in August 1992. On October 9, 2020, we entered into a share exchange agreement (the “Share Exchange Agreement”) with Wetouch Holding Group Limited, a British Virgin Islands company incorporated on August 14, 2020 (“BVI Wetouch”),Wetouch and all the shareholders of BVI Wetouch, to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange for the issuance to such shareholders an aggregate of 28 million shares of our common stock (the “Reverse Merger”). The Reverse Merger closed on October 9, 2020. Immediately after the closing of the Reverse Merger, we had a total of 31,396,3941,569,820 issued and outstanding shares of common stock. As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned subsidiary.

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

 

We are engaged in the research, development, manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens, which constitutes our source of revenues through BVI Wetouch, which owns Hong Kong Wetouch, HK Wetouch, Sichuan Wetouch and Sichuan Wetouch Technology Co., Ltd., a limited liability company organized under the laws of China.Vtouch. We are specialized in large-format touchscreens, which are developed and designed for a wide variety of markets and used in by the financial terminals, automotive, point of sale (POS), gaming, lottery, medical, human machine interface (HMI), and other specialized industries. Our product portfolio comprises medium to large sized projected capacitive touchscreens ranging from 7.0 inch to 42 inch screens. In terms of the structures of touch panels, we offer (i) Glass-Glass (“GG”), primarily used in GPS/car entertainment panels in mid-size and luxury cars, industrial HMI, financial and banking terminals, POS and lottery machines; (ii) Glass-Film-Film (“GFF”), mostly used in high-end GPS and entertainment panels, industrial HMI, financial and banking terminals, lottery and gaming industry; (iii) Plastic-Glass (“PG”), typically adopted by touchscreens in GPS/entertainment panels motor vehicle GPS, smart home, robots and charging stations; and (iv) Glass-Film (“GF”), mostly used in industrial HMI. The following discussion and analysis pertain financial condition and results of operations of our subsidiaries Hong Kong Wetouch, HK Wetouch, Sichuan Wetouch and Sichuan Vtouch for the quarter ended March 31, 2021.September 30, 2022.

 

5

Effects of COVID-19

The COVID-19 pandemic and resulting global disruptions have affected our businesses, as well as those of our customers and suppliers. To serve our customers while also providing for the safety of our employees and service providers, we have modified numerous aspects of our logistics, transportation, supply chain, purchasing, and after-sale processes. Beginning in Q1 2020, we made numerous process updates across our operations worldwide, and adapted our fulfillment network, to implement employee and customer safety measures, such as enhanced cleaning and physical distancing, personal protective gear, disinfectant spraying, and temperature checks. We will continue to prioritize employee and customer safety and comply with evolving state and local standards as well as to implement standards or processes that we determine to be in the best interests of our employees, customers, and communities.

6

Due to the COVID-19 pandemic, our subsidiary Sichuan Wetouch was temporarily shut down from early February 2020 to early March 2020 in accordance with the requirement of the local governments. Our business was negatively impacted and generated lower revenue and net income in 2020. The

Commencing in the spring of 2021, China began to experience an increase in COVID-19 cases, and to some extent, local governments and the national government began to take more restrictive measures to stem the spread of the virus, particularly from October 2021 to December 2021 and various periods in 2022. Since December 2022, many of the restrictive policies previously adopted by the PRC government to control the spread of COVID-19 have been revoked or replaced with more flexible measures. Although there were occasional increases in COVID-19 cases in China after the government abandoned its restrictive policies, as of the date of this Quarterly Report, our PRC subsidiary has resumed normal operations. There are still uncertainties of future impact of the COVID-19 pandemic, and the extent of the impact of COVID-19 on the Company’s results of operations and financial condition will depend on the virus’ future developments,a number of factors, including the duration and severity of the pandemic; and the macroeconomic impact of government measures to contain the spread of the outbreakCOVID-19 and the impact on the Company’s customers, which are still uncertain and cannot be reasonably estimated at this point of time.related government stimulus measures.

Highlights for the three-month period ended March 31, 2021September 30, 2023 include:

Revenues were $10.7$11.1 million, an increasea decrease of 205.7%4.3% from $3.5$11.6 million in the firstthird quarter of 20202022
 
Gross profit was $5.1$4.8 million, an increasea decrease of 218.8%5.9% from $1.6$5.1 million in the firstthird quarter of 20202022
 
Gross profit margin was 47.7%42.9%, compared to 45.7%43.6% in the firstthird quarter of 20202022
 
Net income was $8.4$2.9 million, compared to $1.3$3.3 million in the firstthird quarter of 20202022
 
Total volume shipped was 499,796557,503 units, an increasea decrease of 178.3%2.6% from 179,592572,241 units in the firstthird quarter of 20202022

Results of Operations

Results of Operations - Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

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

(in US Dollar millions, except percentage) Three-Month
Period Ended
December 31,
 Change Change  

Three-Month

Period Ended

September 30,

  Change  

Nine-Month

Period Ended

September 30,

  Change 
 2021 2020 Amount %  2023  2022  %  2023  2022  % 
Revenues $10.7  $3.5  $7.2   205.7% $11.1  $11.6   (4.3)% $37.3  $35.4   5.4%
Cost of revenues  (5.6)  (1.9)  (3.7)  194.7%  (6.3)  (6.6)  (4.5)%  (20.2)  (20.9)  (3.3)%
Gross profit  5.1   1.6   3.5   218.8%  4.8   5.1   (5.9)%  17.1   14.4   21.3%
Total operating expenses  (3.7)  (0.2)  (3.5)  1,750.0%  (0.5)  (0.3)  66.7%  (2.4)  (2.2)  9.1%
Operating income  1.4   1.4   0.0   0.0%  4.3   4.7   (8.5)%  14.7   12.2   20.5%
Gain on asset disposal  7.6   -   7.6   N/A 
                        
Loss on changes of fair values of Common Stock Purchase Warrant  (0.2)  (0.2)  0.0%  (0.1)  0.0   N/A 
Income before income taxes  9.7   1.5   8.2   546.7%  4.0   4.5   (11.1)%  14.4   12.2   18.0%
Income tax expense  (1.3)  (0.2)  (1.1)  550.0%  (1.1)  (1.2)  (8.3)%  (4.1)  (3.4)  20.6%
Net income $8.4  $1.3  $7.1   546.2% $2.9  $3.3   (12.1)% $10.3  $8.8   17.0%

76

 

Results of Operations - Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Revenues

We generated revenue of $10.7 million and $3.5$11.1 million for the three months ended March 31, 2021 and 2020, respectively, an increaseSeptember 30, 2023, a decrease of $7.2$0.5 million, or 205.7%4.3%, compared to $3.5$11.6 million in the same period of last year. This was mainly due to an increase of 178.3% in sales volume and of 9.7% in the average selling price of our products, and 7.1% positive5.7% negative impact from exchange rate due to appreciationdepreciation of RMB against US dollars, a decrease of 2.6% in sales volume and partially offset by an increase of 3.8% in the average RMB selling price of our products, compared with those of the same period of last year.

 For the Three-Month Ended March 31,  For the Three-Month Ended September 30, 
 2021 2020 Change Change  2023  2022  Change  Change 
 Amount % Amount % Amount %  Amount  %  Amount  %  Amount  % 
 (in US Dollar millions except percentage)  (in US Dollar millions except percentage) 
Revenue from sales to customers in PRC $7.2   67.3% $2.3   65.7% $4.9   213.0% $7.4   66.7% $8.1   69.8% $(0.7)  (8.6)%
Revenue from sales to customers overseas  3.5   32.7%  1.2   34.3%  2.3   191.7%  3.7   33.3%  3.5   30.2%  0.2   5.7%
Total Revenues $10.7   100% $3.5   100% $7.2   205.7% $11.1   100% $11.6   100% $(0.5)  (4.3)%

  For the Three-Month Ended March 31, 
  2021  2020  Change  Change 
  Unit  %  Unit  %  Unit  % 
  (in UNIT, except percentage) 
Units sold to customers in PRC 317,413  63.5% 117,047  65.2% 200,366  171.2%
Units sold to customers overseas  182,383   36.5%  62,545   34.8%  119,838   191.6%
Total Units Sold  499,796   100%  179,592   100%  320,204   178.3%

  For the Three-Month Ended September 30, 
  2023  2022  Change  Change 
  Unit  %  Unit  %  Unit  % 
  (in UNIT, except percentage) 
Units sold to customers in PRC  365,623   65.6%  390,542   68.2%  (24,919)  (6.4)%
Units sold to customers overseas  191,880   34.4%  181,699   31.8%  10,181   5.6%
Total Units Sold  557,503   100%  572,241   100%  (14,738)  (2.6)%

(i) Domestic market

For the three months ended March 31, 2021,September 30, 2023, revenue from domestic market increaseddecreased by $4.9$0.7 million or 213.0% 8.6% as a combined result of: (i)of 5.7% negative impact from exchange rate due to depreciation of RMB against US dollars, a decrease of 6.4% in sales volume due to the fluctuation of product demand for products such as POS touchscreens and industrial control touchscreens with increase of raw material costs and higher selling price, and partially offset by an increase of 171.2% in sales volume, and (ii) an increase of 8.6%2.3% in the average RMB selling price of our products, and 7.1% positive impact from exchange rateproducts. For example, our POS touchscreens had an increase of 16% of selling price due to appreciationthe pricing control capability of RMB against US dollars,the Company, compared with those of the same period of last year.

As for the RMB selling price, the increase of 8.6%2.3% was mainly due to the increased sales of new models of higher-end products of such as touch screens used in gaming machinePOS touchscreens, and industrial control computer touchscreens with higher selling priceprices in the domestic market during the three-month period ended March 31, 2021.September 30, 2023.

The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic in January 2020 continued to exacerbate the touch screen business environment. The Company’s business was negatively impacted and has continuedDespite our proactive efforts to generate lower revenues during the first quarter of 2020.

Due to our efforts in marketingmarket new models such as POS touchscreens, medical touchscreens, and industrial control computer touchscreens, and efforts to obtain new customers and penetrate into new customers into new regions, we had our sales increase of 254.7%decreased by 6.0% in South China, 239.0%5.5% in Southwest China, 124.5%and 2.2% in East China yet a decrease of 77.3% in North China.and during the three-month period ended September 30, 2023.

 

(ii) Overseas market

For the three-month period ended March 31, 2021,September 30, 2023, revenues from overseas market was $3.5increased by 5.7% or $0.2 million as compared to $1.2 million of the same period of 2020, increased by $2.3 million or 191.7% 2022, mainly due to anthe increase of 191.6%5.6% in sales volume.volume and the increase of 7.7% in average selling price in RMB in gaming touchscreens and automotive touchscreens during the three-month period ended September 30, 2023.

87

 

POS Touchscreens

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

  

Revenues

For the Three-Month Ended March 31,

 
  2021  2020  Change  Change 
  Amount  %  Amount  %  Amount  Margin% 
  (in US Dollars, except percentage) 
Product categories by end applications                        
Automotive Touchscreens $3,519,642   32.9% $983,567   28.0% $2,536,075   257.8%
Industrial Control Computer Touchscreens  2,235,175   20.9%  802,957   22.9%  1,432,218   178.4%
Gaming Touchscreens  1,574,315   14.7%  628,372   17.9%  945,943   150.5%
Medical Touchscreens  1,216,583   11.4%  219,381   6.3%  997,202   454.6%
POS Touchscreens  1,159,805   10.8%  589,052   16.8%  570,753   96.9%
Multi-Functional Printer Touchscreens  917,031   8.6%  278,652   7.9%  638,379   229.1%
Others*  90,753   0.7%  7,111   0.2%  83,642   1,176.2%
Total Revenues $10,713,304   100.0% $3,509,092   100.0% $7,204,212   205.7%

  

Revenues

For the Three-Month Ended September 30,

 
  2023  2022  Change  Change 
  Amount  %  Amount  %  Amount  Margin% 
  

(in US Dollars, except percentage)

 
Product categories by end applications                        
Automotive Touchscreens $2,945,460   26.5% $2,841,960   24.5% $103,500   3.6%
Industrial Control Computer Touchscreens  2,297,924   20.7%  2,609,467   22.5%  (311,543)  (11.9)%
POS Touchscreens  1,738,935   15.6%  1,989,250   17.1%  (250,315)  (12.6)%
Gaming Touchscreens  1,742,589   15.7%  1,578,004   13.5%  164,585   10.4%
Medical Touchscreens  1,398,203   12.6%  1,579,007   13.6%  (180,804)  (11.5)%
Multi-Functional Printer Touchscreens  1,000,494   9.0%  1,024,278   8.8%  (23,784)  (2.3)%
Others*  -   0.0%  1,052   0.0%  (1,052)  (100.0)%
Total Revenues $11,123,605   100.0% $11,623,018   100.0% $(499,413)  (4.3)%

*Others include applications in self-service kiosks, ticket vending machinemachines and financial terminals.

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

Gross Profit and Gross Profit Margin

  

Three-Month Period Ended

September 30,

  Change 
(in millions, except percentage) 2023  2022  Amount  % 
Gross Profit $4.8  $5.1  $(0.3)  (5.9)%
Gross Profit Margin  42.9%  43.6%      (0.7)%

Gross profit was $4.8 million in the third quarter ended September 30, 2023, compared to $5.1 million in the same period of 2022. Our gross profit margin decreased to 42.9% for the third quarter ended September 30, 2023 as compared to 43.6% for the same period of 2022, primarily due to the decrease of 4.3% in sales revenues and increase of 3.8% in cost of goods sold, including the increase of 7.7% in labor cost and increase of 4.0% in the raw materials such as chip cost by 3.8%, despite the Company shifting our products to higher gross profit margin products such as automotive touchscreens and gaming touchscreens and POS touchscreens.

Selling Expenses

  

Three-Month Period Ended

September 30,

  Change 
(in millions, except percentage) 2023  2022  Amount  % 
Selling Expenses $0.3  $0.2  $0.1   50.0%
as a percentage of revenues  2.7%  1.7%      1.0%

Selling expenses were $0.3 million for the three-month period ended September 30, 2023, compared to $0.2 million in the same period in 2022, primarily due to the more marketing expenses incurred during the three-month period ended September 301, 2023 in order to market new models and penetrate into new regions.

8

 

General and Administrative Expenses

  

Three-Month Period Ended

September 30,

  Change 
(in millions, except percentage) 2023  2022  Amount  % 
General and Administrative Expenses $0.2  $0.1  $0.1   100.0%
as a percentage of revenues  1.8%  0.8%      1.0%

General and administrative (G&A) expenses were $0.2 million for the quarter ended September 30, 2023, compared to $0.1 million in the same period in 2022, primarily due to $0.1 million in professional fees and traveling expenses during the third quarter of 2023.

Research and Development Expenses

  

Three-Month Period Ended

September 30,

  Change 
(in US dollars, except percentage) 2023  2022  Amount  % 
Research and Development Expenses $20,580  $20,737  $(157)  (0.8)%
as a percentage of revenues  0.0%  0.0%      0.0%

Research and development (R&D) expenses were $20,580 for the quarter ended September 30, 2023, compared to $20,737 in the same period in 2022, representing a decrease of $157 of material consumption.

Operating Income

Total operating income was $4.3 million for the third quarter ended September 30, 2023, compared to $4.7 million for the same period of last year, due to lower gross profit, and higher operating expenses.

Loss on changes in fair value of Common Stock Purchase Warrants

  Three-Month Period Ended September 30,  Change 
(in US$ millions, except percentage) 2023  2022  Amount  % 
Loss on changes in fair value of Common Stock Purchase Warrants $(0.2) $(0.2) $(0.0)  0.0%
as a percentage of revenues  1.8%  1.7%      0.1%

Loss on changes in fair value of common stock purchase warrants stayed the same as $0.2 million for the three-month period ended September 30, 2023 and 2022, respectively. (See Note 9 (b)).

9

Income Taxes

  

Three-Month Period Ended

September 30,

  Change 
(in millions, except percentage) 2023  2022  Amount  % 
Income before Income Taxes $4.0  $4.5  $(0.5)   (11.1)%
Income Tax (Expense)  (1.1)  (1.2)  0.1   (8.3)%
Effective income tax rate  28.7%  27.3%      1.4%

The effective income tax rates for the three-month periods ended September 30, 2023 and 2022 were 28.7% and 27.3%, respectively.

Net Income

As a result of the above factors, our net income was $2.9 for the three-month period ended September 30, 2023, as compared to $3.3 million in the same period of 2022.

Results of Operations - Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Revenues

We generated revenue of $37.3 million for the nine-month period ended September 30, 2023, an increase of $1.9 million, or 5.4%, compared to $35.4 million in the same period of last year. This was primarily due to an increase of 4.9% in sales volume, and an increase of 6.8% in the average RMB selling price of our products, and partially offset by 6.2% negative impact from exchange rate due to depreciation of RMB against US dollars, compared with those of the same period of last year.

  For the Nine-Month Ended September 30, 
  2023  2022  Change  Change 
  Amount  %  Amount  %  Amount  % 
  (in US Dollar millions except percentage) 
Revenue from sales to customers in PRC $25.8   69.2% $24.5   69.2% $1.3   5.3%
Revenue from sales to customers overseas  11.5   30.8%  10.9   30.8%  0.6   5.5%
Total Revenues $37.3   100% $35.4   100% $1.9   5.4%

  For the Nine-Month Ended September 30, 
  2023  2022  Change  Change 
  Unit  %  Unit  %  Unit  % 
  (in UNIT, except percentage) 
Units sold to customers in PRC  1,207,931   66.5%  1,129,764   66.5%  78,167   6.9%
Units sold to customers overseas  574,988   33.5%  569,144   33.5%  5,844   1.0%
Total Units Sold  1,782,919   100%  1,698,908   100%  84,011   4.9%

(i) Domestic market

For the nine-month period ended September 30, 2023, revenue from domestic market increased by $1.3 million or 5.3%. This was primarily due to an increase of 6.9% in sales volume due to market demand for gaming touchscreen, and medical touchscreens, and an increase of 4.8% in the average RMB selling price of our products, and partially offset by 6.2% negative impact from exchange rate due to depreciation of RMB against US dollars, compared with those of the same period of last year.

As for the RMB selling price, the increase of 4.8% was mainly due to the increased sales of new models of higher-end products such as medical touchscreens, automotive touchscreens, POS touchscreens, industrial control computer touchscreens and gaming touch screens with higher selling prices in the domestic market during the three-month period ended September 30, 2023.

10

The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic in January 2020 continued to exacerbate the touch screen business environment. Due to our proactive efforts to market new models such as medical touchscreens, industrial control computer touchscreens, and POS touchscreens and efforts to obtain new customers and penetrate into new regions, we had sales increases of 20.5% in Southwest China, 10.4% in South China, and 8.3% in East China during the nine-month period ended September 30, 2023.

(ii) Overseas market

For the nine-month period ended September 30, 2023, revenues from overseas market were $11.5 million as compared to $10.9 million of the same period of 2022, an increase of $0.6 million or 5.5% mainly due to the increase of 11.2% in average selling price, and increase of 1.0% in sales volume as a result of demand increasing from overseas market such as gaming touchscreens and automotive touchscreens for the nine-month period ended September 30, 2023.

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

  

Revenues

For the Nine-Month Ended September 30,

 
  2023  2022  Change  Change 
  Amount  %  Amount  %  Amount  Margin% 
  (in US Dollars, except percentage) 
Product categories by end applications                        
Automotive Touchscreens $9,390,350   25.2% $8,759,635   24.8% $630,715   7.2%
Industrial Control Computer Touchscreens  7,392,780   19.8%  7,251,728   20.5%  141,052   1.9%
POS Touchscreens  6,084,523   16.3%  5,963,500   16.9%  121,023   2.0%
Gaming Touchscreens  5,387,021   14.4%  5,144,703   14.5%  242,318   4.7%
Medical Touchscreens  5,380,498   14.4%  4,627,854   13.1%  752,644   16.3%
Multi-Functional Printer Touchscreens  3,696,326   9.9%  3,618,124   10.2%  78,202   2.2%
Others*  -   0.0%  4,955   0.0%  (4,955)  (100.0)%
Total Revenues $37,331,498   100.0% $35,370,499   100.0% $(1,960,999)  5.4%

*Others include applications in self-service kiosks, ticket vending machines and financial terminals.

The Company continued to shift production mix from traditional lower-end products such as touchscreens used in automotive and industrial control computer industries to high-end products such as touchscreens used in self-service kiosks, medical touchscreen, automotive touchscreens, ticket vending machinePOS touchscreens, and financial terminals.,multi-functional printer touchscreens, primarily due to (i) greater growth potential of computer screen models in China, and (ii) the stronger demand and better quality demand from consumers’ recognition of higher-end touch screens made bywith better raw materials.

Gross Profit and Gross Profit Margin

 

Three-Month Period Ended

March 31,

  Change  

Nine-Month Period Ended

September 30,

  Change 
(in millions, except percentage) 2021 2020 Amount %  2023  2022  Amount  % 
Gross Profit $5.1  $1.6  $3.5   218.8% $17.1  $14.4  $2.7   18.8%
Gross Profit Margin  47.7%  45.7%      2.0%  45.7%  40.8%      4.9%

Gross profit was $5.1$17.1 million induring the first quarternine-month period ended March 31, 2021,September 30, 2023, compared to $1.6$14.4 million in the same period of 2020.2022. Our gross profit margin increased to 47.7%45.7% for the first quarternine-month period ended March 31, 2021September 30, 2023 as compared to 45.7%40.8% for the same period of 2020,2022, primarily due to product mix shift to higher gross profit marginthe increase of sales by 5.4%, particularly high-end products such as self-service kiosks, ticket vending machinemedical touchscreens, automotive touchscreens, and financial terminals.gaming touchscreens for the nine-month period ended September 30, 2023, partially offset by the increase in cost of goods sold by 2.4% including increase of cost of materials such as chip cost by 2.6% and labor cost by 8.2%, for the nine-month period ended September 30, 2023.

11

 

Selling Expenses

  

Nine-Month Period Ended

September 30,

  Change 
(in millions, except percentage) 2023  2022  Amount  % 
Selling Expenses $0.4  $1.2  $(0.8)  (66.7)%
as a percentage of revenues  3.6%  3.4%      0.2%

Selling expenses were $0.4 million for the nine-month period ended September 30, 2023 compared to $1.2 million in the same period in 2022, representing a decrease of 66.7%, or $0.8 million, primarily due to the marketing expenses of $1.0 million during the nine-month months ended September 31, 2022 as the Company increased marketing expenses of $1.0 million to promote Company’s products, coping with the extreme local and national government lockdown for restrictive measures for COVID-19. China started to revoke the restrictive policies previously adopted by the PRC government in late December 2022 by replacing with more flexible measures.

General and Administrative Expenses

 

Three-Month Period Ended

March 31,

 Change  

Nine-Month Period Ended

September 30,

  Change 
(in millions, except percentage) 2021 2020 Amount %  2023  2022  Amount  % 
General and Administrative Expenses $0.5 $0.2 $0.3 150.0% $1.9  $0.9  $1.0   111.1%
as a percentage of revenues 4.7% 5.7%   (1.0)%  5.1%  2.5%      2.6%

General and administrative (G&A) expenses were $0.5$1.9 million for the quarternine-month period ended March 31, 2021,September 30, 2023, compared to $0.2$0.9 million in the same period in 2020,2022, representing an increase of 150.0%111.1%, or $0.3$1.0 million. The increase was primarily due to (i) the increase of $0.1accrued $1.2 million accelerated amortization expense due to Sichuan Wetouch ceasing operation and relocation to complyunderwriting fees in connection with local PRC government guidelines on local environment issues anda private placement, partially offset by the national overall plan. See Note 4, and (ii) the increasedecrease of $0.2 million in salary and wages and other miscellaneous expenses. On March 18, 2023, the Company entered into a consent agreement with representatives related to the private placement on the fees of US$1.2 million, payable only on the completion of an underwritten offering (see Note 8).

9

Research and Development Expenses

 

Three-Month Period Ended

March 31,

 Change  

Nine-Month Period Ended

September 30,

  Change 
(in US dollars, except percentage) 2021 2020 Amount %  2023  2022  Amount  % 
Research and Development Expenses $22,180 $15,342 $6,838 44.5% $61,849  $65,307  $(3,458)  (5.3)%
as a percentage of revenues 0.0% 0.0%   0.0%  0.0%  0.0%      0.0%

Research and development (R&D) expenses were $22,180$61,849 for the quarternine-month period ended March 31, 2021September 30, 2023 compared to $15,342$65,307 in the same period in 2020, representing a decrease $6,838.2022.

Operating Income

Share-based Compensation

  

Three-Month Period Ended

March 31,

  Change 
(in millions, except percentage) 2021  2020  Amount  % 
Share-based compensation $3.1  $0.0  $3.1   0.0%
as a percentage of revenues  29.0%  0.0%      29.0%

Share-based compensationTotal operating income was $3.1$14.7 million for the quarternine-month period ended March 31, 2021September 30, 2023 as compared to nil in the same period in 2020. On January 1, 2021, the Board$12.2 million of Directors of the Company authorized the issuance of an aggregate of 310,830 shares and 631,080 warrants to Ascendant Global Advisors, Inc. for advisory services that had been rendered. The Company recognized relevant share-based compensation expense of $1,041,281 for the vested shares and $2,107,825 for the warrants.

Operating Income

Total operating income stayed at $1.4 million for the first quarter ended quarter ended March 31, 2021 and the same period of last year.year due to higher gross profit and lower selling expenses, partially offset by higher G&A expenses.

Gain on Asset Disposal

  

Three-Month Period Ended

March 31,

  Change 
(in millions, except percentage) 2021  2020  Amount  % 
Gain on asset disposal $7.6  $0.0  $7.6   0.0%
as a percentage of revenues  71.0%  0.0%      71.0%

Gain on asset disposal was $7.6 million for the quarter ended March 31, 2021 compared to nil in the same period in 2020. Pursuant to local PRC government guidelines on local environment issues and the national overall plan, Sichuan Wetouch is under the government directed relocation order no later than December 31, 2021 and got compensated accordingly. On March 18, 2021, pursuant to the agreement with the local government and an appraisal report issued by a mutual agreed appraiser, Sichuan Wetouch received a compensation of RMB115.2 million ($17.8 million) (“Compensation Funds”) for the withdrawal of the right to use of state-owned land and the demolition of all buildings, facilities, equipment and all other appurtenances on the land. During the three-month period ended March 31, 2021, the Company recorded a gain of $7,611,646 for the asset disposal.

Income Taxes

  

Three-Month Period Ended

March 31,

  Change 
(in millions, except percentage) 2021  2020  Amount  % 
Income before Income Taxes $9.7  $1.5  $8.2   546.7%
Income Tax (Expense)  (1.3)  (0.2)  (1.1)  550.0%
Effective income tax rate  13.9%  15.0%      (1.1)%

1012

 

Gain (loss) on changes in fair value of Common Stock Purchase Warrants

  Nine-Month Period Ended September 30,  Change 
(in millions, except percentage) 2023  2022  Amount  % 
Gain (loss) on changes in fair value of Common Stock Purchase Warrants $(0.2) $0.0  $(0.2)  N/A 
as a percentage of revenues  1.8%  0.0%      1.8%

Loss on changes in fair value of common stock purchase warrants was $0.2 million for the nine-month period ended September 30, 2023, as compared to a gain of $35,542 in the same period of 2022 (See Note 9 (b)).

Income Taxes

  

Nine-Month Period Ended

September 30,

  Change 
(in millions, except percentage) 2023  2022  Amount  % 
Income before Income Taxes $14.4  $12.2  $2.2   18.0%
Income Tax (Expense)  (4.1)  (3.4)  (0.7)  20.6%
Effective income tax rate  28.5%  27.9%      0.6%

The effective income tax rates for the three-monthnine-month periods ended March 31, 2021September 30, 2023 and 20202022 were 13.9%28.5% and 15.0%27.9%, respectively. The effective income tax rate for the three-monthnine-month period ended March 31, 2021 differs from the PRC statutory income tax rate of 25%September 30, 2023 increase was primarily due to Sichuan Wetouch’s preferentialmore taxable income tax rate.for the nine-month periods ended September 30, 2023.

Our PRC subsidiary Sichuan WetouchVtouch had $54.5$93.9 million of cash and cash equivalents of March 31, 2021,September 30, 2023, which are planned to be indefinitely reinvested in PRC. The distributions from our PRC subsidiary are subject to the U.S. federal income tax at 21%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of our PRC subsidiaries.

Net Income

As a result of the above factors, we had a net income of $8.4$10.3 million in the first quarter of 2021nine-month period ended September 30, 2023 compared to a net income of $1.3$8.8 million in the same quarterperiod of 2020.2022.

Liquidity and Capital Resources

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

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

 13

 

As of March 31, 2021,September 30, 2023, we had current assets of $59$109.1 million, consisting of $54$93.9 million in cash, $4.5$13.9 million in accounts receivable, $195,057$0.2 million in inventories, and $16,109$1.0 million in prepaid expenses other current assets. Our current liabilities as of March 31, 2021,September 30, 2023, were $3.6$7.3 million, which is comprised of $2$1.5 million in accounts payable, $628,604$3.1 million in amounts due to related parties, $7883,098accrued expenses, $1.1 million in income tax payable, and $186,036 in accrued expenses and other current liabilities.liabilities and $1.2 million convertible promissory notes payable.

The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the three monthsnine-month period ended March 31, 2021September 30, 2023 and 2020:2022:

 

Three-Month Period Ended

March 31,

  

Nine-Month Period Ended

September 30,

 
(in US Dollar millions) 2021 2020  2023  2022 
Net cash provided by operating activities $13.7  $2.4  $9.0  $4.8 
Net cash provided by investing activities  17.8   -   -   - 
Net cash used in financing activities  -   -   39.9   - 
Effect of foreign currency exchange rate changes on cash and cash equivalents  (1.0)  (0.3)  (6.2)  (5.4)
Net increase in cash and cash equivalents  30.5   2.1 
Net increase (decrease) in cash and cash equivalents  42.7   (0.6)
Cash and cash equivalents at the beginning of period  24.0   14.3   51.2  46.1 
Cash and cash equivalents at the end of period $54.5  $16.4  $93.9  $45.5 

Operating Activities

Net cash provided by operating activities was $13.7$9.0 million for the three-monthnine-month period ended March 31, 2021,September 30, 2023, as compared to $2.4$4.8 million provided byused in operating activities for the same period of the last year, primarily due to (i) the increase of $7.1$1.5 million net income for the three-monthnine-month period ended March 31, 2021September 30, 2023 as compared to the same period of 2020,2022, (ii) the increase of $3.1$0.2 million loss on changes of share-based compensation, (ii)FV of common stock purchase warrants for the nine-month period ended September 30, 2023; (iii) the decrease of $8.1$1.8 million of accounts receivable for the nine-month period ended September 30, 2023 due to Sichuan Wetouch settled customerfaster collection of receivables, for the three-month period ended March 31, 2021, (iii) the increase of $1.1 million income tax payable due to income tax clearance for Sichuan Wetouch during the three-month period ended March 31, 2021, partially offset by (iv) the decrease of $7.6$0.4 million gain on asset disposalin inventories, (v) the increase of $1.8 million of accrued expenses and other current liabilities for the three-monthnine-month period ended March 31, 2021 as compared toSeptember 30, 2023, partially offset by (vi) the samedecrease in $0.5 million in account payable, and (vii) the increase of $0.8 million in prepaid expenses and other current assets for the nine-month period of 2020.ended September 30, 2023.

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Investing Activities

There were $17.8 million proceeds from asset disposalnil investing activities for Sichuan Wetouch for the three-monthnine-month period ended March 31, 2021. See Note 4 in the interim financial information .September 30, 2023 and 2022.

Financing Activities

There were noNet cash provided by financing activities for the three-monthnine-month period ended March 31, 2021 and 2020.September 30, 2023 was $40.0 million, due to the $40.0 million proceeds from stock issuance in a private placement, partially offset by the repayment of $55,000 convertible promissory note payable.

There were nil financing activities for the September 30, 2022.

As of March 31, 2021,September 30, 2023, our cash and cash equivalents were $54.5$93.9 million, as compared to $24.0$51.2 million at December 31, 2020.2022.

Days Sales Outstanding (“DSO”) has decreased to 6983 days for the three-monthnine-month period ended March 31, 2021September 30, 2023 from 16181 days for the year ended December 31, 2020 as a result of Sichuan Wetouch settled all accounts receivable collection from customers.2022.

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The following table provides an analysis of the aging of accounts receivable as of March 31, 2021September 30, 2023 and December 31, 2020:2022:

 

March 31, 2021

 December 31, 2020  September 30,
2023
  December 31,
2022
 
-Current $4,502,711  $3,531,963  $6,473,561  $1,252,152 
-1-3 months past due  -   8,136,340   5,527,382   4,998,596 
-4-6 months past due  -   123,581   1,930,839   2,806,973 
7-12 months past due  -   160,844   -   20 
-greater than 1 year past due  -   49,726   -   - 
Total accounts receivable $4,502,711  $12,002,454  $13,931,782  $9,057,741 

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

Our industry typical payment term is 180 days. Accounts receivable are written off against the allowances only after exhaustive collection efforts. There was a stalled collection activities during February and March 2020, during which most businesses except essential services were operated.

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

Quantitative and Qualitative Disclosures about Market Risks

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.

Foreign Currency Exchange Rates

The some of our revenues are collected in and our expenses are paid in RMB. We face foreign currency rate translation risks when our results are translated to U.S. dollars.

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The RMB was relatively stable against the U.S. dollar at approximately 8.28 RMB to the US$1.00 until July 21, 2005 when the Chinese currency regime was altered resulting in a 2.1% revaluation versus the U.S. dollar. From July 21, 2005 to September 30, 2010, the RMB exchange rate was no longer linked to the U.S. dollar but rather to a basket of currencies with a 0.3% margin of fluctuation resulting in further appreciation of the RMB against the U.S. dollar. Since September 30, 2009, the exchange rate had remained stable at 6.8307 RMB to 1.00 U.S. dollar until September 30, 2010 when the People’s Bank of China allowed a further appreciation of the RMB by 0.43% to 6.798 RMB to 1.00 U.S. dollar. The People’s Bank of China allowed the RMB and U.S. dollar exchange rate to fluctuate within 1% on April 16, 2012 and 2% on March 17, 2014, respectively. On March 31, 2021, the RMB traded at 6.5518 RMB to 1.00 U.S. dollar.

There remains international pressure on the Chinese government to adopt an even more flexible currency policy and the exchange rate of RMB is subject to changes in China’s government policies which are, to a large extent, dependent on the economic and political development both internationally and locally and the demand and supply of RMB in the domestic market. There can be no assurance that such exchange rate will continue to remain stable in the future amongst the volatility of currencies, globalization and the unstable economies in recent years. Since (i) our revenues and net income of our PRC operating entities are denominated in RMB, and (ii) the payment of dividends, if any, will be in U.S. dollars, any decrease in the value of RMB against U.S. dollars would adversely affect the value of the shares and dividends payable to shareholders, in U.S. dollars.

Inflation

To date, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2019, 2018 and 2017 were increases of 2.9%, 2.1% and 1.6%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Quantitative and Qualitative Disclosures About Market Risk.

Not applicable because we are a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES.Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures 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. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2021September 30, 2023 due to the material weaknesses in internal control over financial reporting described below. Because of our significant reliance on our Chairman, Mr. Cai andlimited operations, we have a lacklimited number of English speakers who understand SEC rules and regulations, we lackemployees which prohibits a proper segregation of duties. In addition, we lack a formal audit committee with a financial expert. As we grow and expand our operations we will engage competentadditional employees and experts as needed. However, there can be no assurance that weour operations will be successful at properly designing and maintaining adequate disclosure controls and procedures.expand.

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Changes in Internal Control Over Financial Reporting

There have beenwere no changes in our internal control over financial reporting that occurred during the last fiscal quarter ended March 31, 2021period covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

WeFrom time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

As of September 30, 2023, we know of no material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.

ITEM 1A. RISK FACTORS.

Not required for smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.During the three months ended September 30, 2023, there were no modifications, adoptions or terminations by any directors or officers to any contract, instruction or written plan for the purchase or sale of securities of the Company that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or non-Rule 10b5-1 trading agreements.

ITEM 6. EXHIBITS.

Exhibit

No.

Description
31.1
31.1Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1Certifications of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

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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.

WETOUCH TECHNOLOGY INC.
Date: May 24, 2021November 14, 2023By:/s/ Zongyi Lian
Name:Zongyi Lian
Title:President and Chief Executive Officer (Principal Executive Officer)
Date: May 24, 2021November 14, 2023By:/s/ Yuhua Huang
Name:Yuhua Huang
Title:Chief Financial Officer (Principal Financial and Accounting Officer)

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