Filed
pursuant to Rule 424(b)(4)
Registration
No. 333-270726
PROSPECTUS
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_001.jpg)
WETOUCH
TECHNOLOGY INC.
2,160,000
shares of Common Stock
We
are offering to sell 2,160,000 shares of our common stock, $0.001 par value per share, in a firm commitment underwritten offering
(the “Underwritten Offering”). The public offering price is $5.00 per share.
Our common stock was previously
traded on the OTCQB Marketplace operated by the OTC Markets Group, Inc. (the “OTCQB”) under the symbol “WETH.”
Our common stock has been approved for listing on the Nasdaq Capital Market under the symbol “WETH” and will commence trading
on the Nasdaq Capital Market on February 21, 2024.
We
have effected a 1-for-20 reverse stock split of our outstanding common stock, with the number of authorized shares of common
stock reduced ratably, effective on September 12, 2023 (the “2023 Reverse Stock Split”). Unless expressly
stated herein, all share and per-share information contained herein has been adjusted to account for the 2023 Reverse Stock Split.
INVESTING
IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. BEFORE MAKING ANY INVESTMENT DECISION, YOU SHOULD CAREFULLY REVIEW AND CONSIDER ALL
THE INFORMATION IN THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, INCLUDING THE RISKS AND UNCERTAINTIES DESCRIBED
UNDER “RISK FACTORS” BEGINNING ON PAGE 12.
Wetouch
Technology Inc. is not a Chinese operating company, but a holding company incorporated under the laws of the state of Nevada with operations
conducted by our subsidiary based in Mainland China. We hold equity interests in our subsidiary and do not use a variable interest
entity structure. Our structure involves unique risks to investors. See “Risk Factors — Risks Related to Doing
Business in China.” Unless the context provides otherwise, references in this registration statement to “we,” “us,”
“our company,” “our,” “the Company” and “Wetouch” refers to Wetouch Technology Inc, “BVI
Wetouch” refers to Wetouch Holding Group Limited, a limited company organized under the laws of British Virgin Islands and a wholly
owned subsidiary of Wetouch, “HK Wetouch” refers to Hong Kong Wetouch Technology Limited (香港偉易達科技有限公司),
a limited company organized under the laws of Hong Kong and a wholly owned subsidiary of BVI Wetouch, and “Sichuan Vtouch”
refers to Sichuan Vtouch Technology Co., Ltd (四川伟大奇科技有限公司),
a limited liability company organized under the PRC laws and a wholly foreign owned subsidiary of HK Wetouch. See “Commonly
Used Defined Terms” on page ii herein. Investors would be purchasing interests in Wetouch Technology Inc., a Nevada company.
We
face various legal and operational risks and uncertainties related to being based in and having all of our operations in Mainland
China. The PRC government has significant authority to exert influence on the ability of a company with Mainland China-based
operations, such as us, to conduct its business, accept foreign investments or list on a U.S. or other foreign exchanges. For example,
we face risks associated with regulatory approvals of offshore offerings, anti-monopoly regulatory actions, as well as oversight on cybersecurity
and data privacy. Such risks could result in a material change in our operations and/or the value of our common stock or could significantly
limit or completely hinder our ability to offer or continue to offer our common stock and/or other securities to investors and cause
the value of such securities to significantly decline or be worthless. In addition, the PRC government has significant oversight and
discretion over the conduct of our business and may intervene with or influence the operations of our Mainland China subsidiary
as the government deems appropriate to further regulatory, political and societal goals. The PRC government has recently published new
policies that significantly affected certain industries such as the education and internet industries, and we cannot rule out the possibility
that it will in the future release regulations or policies regarding our industry that could adversely affect our business, financial
condition and results of operations. Furthermore, the PRC government has recently indicated an intent to exert more oversight and control
over overseas securities offerings and other capital markets activities and foreign investment in companies with Mainland China-based
operations like us. Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability
to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in extreme cases,
become worthless. On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing
by Domestic Companies (the “Trial Administrative Measures”), which took effect on March 31, 2023. The Trial Administrative
Measures further stipulate the rules and requirements for overseas offerings and listings conducted by Mainland China domestic
companies. Our PRC counsel has advised that because our common stock currently trades in the U.S., we are not required to submit filings
to the CSRC before this offering is completed and this offering is not conditioned on CSRC approval. Rather, within three days of the
closing of this offering, we must submit filings to the CSRC in accordance with the Trial Administrative Measures. However, given that
the Trial Administrative Measures were recently promulgated, there remain substantial uncertainties as to their interpretation, application,
and enforcement and there is no guarantee that the relevant PRC government agencies, including the CSRC, would reach the same conclusion
that we and our PRC counsel have reached. In addition, if we were to fail to comply with the post-offering filing obligations imposed
by the Trial Administrative Measures or make a misrepresentation, misleading statement or material omission in the materials we
submit to the CSRC, the CSRC would have the right to order rectification, issue a warning and impose a fine on us of between RMB
1 million and RMB 10 million and issuing a warning to the parties responsible for such failure, misrepresentation or material
omission and impose a fine on each of such individuals ranging from RMB 500,000 to RMB 5 million. See “Risk Factor - Upon
the effectiveness of the Trial Administrative measures, we will be subject to the Trial Administrative Measures, as the Company has:
(i) 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated
financial statements for the most recent accounting year is accounted for by Mainland China domestic companies; and (ii) the main
parts of the issuer’s business activities are conducted in Mainland China, or its main places of business are located in
Mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled
in Mainland China; and we cannot assure you that we will be able to complete such process on time or at all.”
We, as an offshore holding company,
are permitted under PRC laws and regulations to provide funding to our Mainland China subsidiary only through loans or capital contributions.
Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our Mainland
China subsidiary or make additional capital contributions to our Mainland China subsidiary to fund their capital expenditures or working
capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all.
In addition, although we currently intend to retain most, if not all, of our available funds and any future earnings to fund the development
and growth of our business, and we do not expect to pay any cash dividends in the foreseeable future, we may rely on dividends and other
distributions on equity paid by our Chinese subsidiaries for our cash and financing requirements. Our Mainland China subsidiary may be
permitted to pay dividends only out of its accumulated profits. However, such Mainland China subsidiary is required to set aside at least
10% of its after-tax profits each year, after making up for previous year’s accumulated losses, if any, to fund certain statutory
reserves, until the aggregate amount of such funds reaches 50% of its registered capital. This portion of such Mainland China subsidiary’s
respective net assets are prohibited from being distributed to its shareholders as dividends. To date, there have not been any cash flows,
transfers of other assets, dividends or other distributions among us and any of our subsidiaries. As of the date of this prospectus,
neither we nor any of our subsidiaries have ever paid dividends or made distributions to U.S. investors. In the future, cash proceeds
raised from overseas financing activities, including this Underwritten Offering, may be transferred by us to our Chinese subsidiaries
via capital contribution or loans, as the case may be. As of the date of this prospectus, Wetouch, BVI Wetouch, HK Wetouch and Sichuan
Vtouch have not adopted or maintained any cash management policies and procedures that dictate how funds are transferred.
The
Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020 and amended by the Consolidated Appropriations
Act, 2023 enacted on December 29, 2022. The amended HFCAA states that if the SEC determines that we have filed audit reports issued by
a registered public accounting firm that has not been subject to inspection by the PCAOB for two consecutive years, the SEC shall prohibit
our common stock from being traded on a national securities exchange or in the over-the-countertrading market in the United States. The
Consolidated Appropriations Act, 2023 reduced the number of consecutive non-inspection years required for triggering the prohibitions
under the HFCAA from three years to two years. On December 16, 2021, the PCAOB issued its report notifying the SEC of its determination
that it was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China or Hong Kong.
Our auditor, B F Borgers CPA PC, is an independent registered public accounting firm headquartered in the United States. Our auditor
is currently subject to PCAOB inspections and has been inspected by the PCAOB on a regular basis. On December 15, 2022, the PCAOB issued
a report that vacated its December 16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions where
it is unable to inspect or investigate completely registered public accounting firms.
Each
year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other
jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting
firms in mainland China and Hong Kong and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report
on our financial statements filed with the SEC, we would be identified as a “Commission-Identified Issuer” following the
filing of the annual report on Form 10-K for the relevant fiscal year. There can be no assurance that we would not be identified as a
“Commission-Identified Issuer” for any future fiscal year, and if we were so identified for two consecutive years, we would
become subject to the prohibition on trading under the HFCAA. The delisting of our common stock, or the threat of their being delisted,
may materially and adversely affect the value of your investment. These risks could result in a material adverse change in our operations
and the value of our common stock, significantly limit or completely hinder our ability to offer or continue to offer securities to investors,
or cause the value of such securities to significantly decline or become worthless. See “Risk Factors—Risks
Related to Doing Business in China—Our common stock will be prohibited from trading in the United States under the Holding Foreign
Companies Accountable Act, or the HFCAA, if it is later determined that the PCAOB is unable to inspect and investigate completely our
auditor. The delisting of and prohibition from trading our common stock, or the threat of their being delisted and prohibited from trading,
may cause the value of our common stock to significantly decline or be worthless.”
For a detailed description of
risks related to doing business in China, see “Risk Factors — Risks Related to Doing Business in China.”
The
Underwritten Offering is being underwritten on a firm commitment basis. We have granted the underwriters an option to buy up to an additional
324,000 shares of common stock to cover over-allotments. The underwriters may exercise this option at any time and from time to
time during the 45-day period from the date of this prospectus.
| |
Per Share | | |
Total | |
Public offering price | |
$ | 5.00 | | |
$ | 10,800,000 | |
Underwriting discounts
and commissions(1)(2) | |
$ | 0.35 | | |
$ | 756,000 | |
Proceeds to us, before expenses | |
$ | 4.65 | | |
$ | 10,044,000 | |
(1)
We have agreed to reimburse the underwriter(s) for certain expenses. Underwriting discounts and commissions do not include a non-accountable
expense allowance equal to $100,000 payable to the underwriters at the closing. The underwriters will receive an underwriting discount
equal to 7.0% of the gross proceeds in this Underwritten Offering. In addition, we have agreed to pay up to a maximum of $180,000
of accountable out-of-pocket expenses of the underwriters in connection with this Underwritten Offering, which includes the fees and
expenses of underwriters’ counsel. See “Underwriting” Section for more information.
(2)
We have also agreed to issue to WestPark Capital, Inc. and Craft Capital Management LLC (collectively the “Representatives”)
warrants to purchase up to an aggregate of 49,680 shares of our common stock, assuming the full exercise of the over-allotment
option by the underwriters. See “Underwriting” beginning on page 90 for additional information regarding
these warrants and underwriting compensation generally.
The underwriter(s) are obligated
to take and pay for all the shares of common stock offered by this prospectus if the Underwritten Offering is consummated.
The
underwriter(s) expect to deliver the shares on or about February 23, 2024.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
WestPark
Capital |
Orientiert |
Craft
Capital |
R.F.
Lafferty |
The
date of this prospectus is February 20, 2024
WETOUCH
TECHNOLOGY INC.
TABLE
OF CONTENTS
You should rely only on the information
contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide
you with different information. We are offering to sell, and seeking offers to buy, shares of common stock
only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock. Our business, financial
condition, operating results and prospects may have changed since that date.
No
action is being taken in any jurisdiction outside the United States to permit a public offering of our shares or possession or
distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions
outside the United States are required to inform themselves about and to observe any restrictions as to the Underwritten Offering
and the distribution of this prospectus applicable to that jurisdiction.
COMMONLY
USED DEFINED TERMS
Unless
otherwise indicated or the context requires otherwise, references in this registration statement to:
● |
“China,”
“Chinese,”
or the “PRC” are to the People’s Republic of China, including the
special administrative regions of Hong Kong and Macau, and, for the purposes of this
prospectus only, excluding Taiwan; |
|
|
● |
Unless the context provides
otherwise, “we,” “us,” “our company,” “our,” “the Company” and “Wetouch”
is to Wetouch Technology Inc., a Nevada company; |
|
|
● |
“BVI” is to
the British Virgin Islands; |
|
|
● |
“BVI Wetouch”
is to Wetouch Holding Group Limited, a limited company organized under the laws of British Virgin Islands and a wholly owned subsidiary
of Wetouch; |
|
|
● |
“Hong Kong Wetouch”
is to Hong Kong Wetouch Electronics Technology Limited (香港偉易達電子科技有限公司),
a limited company organized under the laws of Hong Kong and a wholly owned subsidiary of BVI Wetouch. On June 18, 2021, Hong Kong
Wetouch submitted its application for dissolution and was dissolved on March 18, 2022. |
|
|
● |
“HK Wetouch”
is to Hong Kong Wetouch Technology Limited (香港偉易達科技有限公司),
a limited company organized under the laws of Hong Kong and a wholly owned subsidiary of BVI Wetouch; |
|
|
● |
“Mainland China” is to the mainland of
the People’s Republic of China; excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes
of this prospectus only; |
|
|
● |
“PRC laws and regulations” or “PRC
laws” are to the laws and regulations of Mainland China; |
|
|
● |
“Sichuan Wetouch”
is to Sichuan Wetouch Technology Co., Ltd (四川伟易达科技有限公司),
a limited liability company organized under the PRC laws and prior wholly foreign owned subsidiary of Hong Kong Wetouch. Sichuan
Wetouch’s business and operations have been assumed by Sichuan Vtouch; |
|
|
● |
“Sichuan Vtouch”
is to Sichuan Vtouch Technology Co., Ltd (四川伟大奇科技有限公司),
a limited liability company organized under the PRC laws and a wholly foreign owned subsidiary of HK Wetouch; |
● |
“Qixun
Samoa” is to Qixun Technology (Samoa) Limited, a limited liability company organized under the laws of Samoa and a shareholder
of Wetouch, holding 38,319 shares of the Company; |
|
|
● |
“Qihong
Samoa” is to Qihong Technology (Samoa) Limited, a limited liability company organized under the laws of Samoa and a shareholder
of Wetouch, holding 84,904 shares of the Company; |
|
|
● |
“Shares,”
“shares” or “shares of common stock” are to the shares of common stock of Wetouch Technology Inc., with par
value of $0.001 per share; |
|
|
● |
All
references to “Renminbi,” “RMB” or “Chinese Yuan” is to the legal currency of Mainland China; |
|
|
● |
All
references to “U.S. dollars,” “dollars,” “USD” or “$” are to the legal currency of
the United States; and |
|
|
● |
“Websites”
are to our websites at www.wetouchinc.com and www.wetouch.com.cn, the latter of which is only accessible in Mainland China. |
This
registration statement contains translations of certain RMB amounts into U.S. dollar amounts at specified rates solely for the convenience
of the reader. The relevant exchange rates are listed below:
| |
For the year
Ended
December 31,
2021 | | |
For the Year
Ended
December 31,
2022 | |
Period Ended RMB: USD exchange rate | |
| 6.3726 | | |
| 6.8972 | |
Period Average RMB: USD exchange rate | |
| 6.4505 | | |
| 6.7290 | |
Numerical
figures included in this registration statement have been subject to rounding adjustments. Accordingly, numerical figures shown as totals
in various tables may not be arithmetic aggregations of the figures that precede them.
For
the sake of clarity, this registration statement follows the English naming convention of first name followed by last name, regardless
of whether an individual’s name is Chinese or English.
We
have relied on statistics provided by a variety of publicly-available sources regarding Mainland China’s expectations of
growth. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not
incorporated in this registration statement other than to the extent specifically cited herein. We have sought to provide current information
in this registration statement and believe that the statistics provided in this registration statement remain up-to-date and reliable,
and these materials are not incorporated in this registration statement other than to the extent specifically cited in this registration
statement.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. This summary provides an overview of selected information and
does not contain all of the information you should consider before investing in our securities. You should read the entire prospectus
carefully, especially the “Risk Factors,” and our financial statements and the accompanying notes to those statements, included
elsewhere in this prospectus, before making an investment decision. Unless the context requires otherwise, references to the “Company,”
“we,” “us,” and “our” refer to Wetouch Technology Inc., a Nevada corporation.
Overview
We
were originally incorporated under the laws of the state of Nevada on August 31, 1992. On October 9, 2020, we entered into a share exchange
agreement (the “Share Exchange Agreement”) with BVI Wetouch, and all the shareholders of BVI Wetouch (each a “Shareholder”
and collectively the “Shareholders”), to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange
for the issuance to the Shareholders an aggregate of 28 million shares of our common stock (the “Reverse Merger”) (presented
on a pre-split basis of the 2023 Reverse Stock Split). The Reverse Merger closed on October 9, 2020. Immediately after the
closing of the Reverse Merger, we had a total of 31,396,394 issued and outstanding shares of common stock (presented
on a pre-split basis of the 2023 Reverse Stock Split). As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned
subsidiary.
Through
our wholly-owned subsidiaries, we are engaged in the research, development, manufacturing, sales and servicing of medium to large sized
projected capacitive touchscreens. We specialize in large-format touchscreens, which are developed and designed for a wide variety of
markets and used in the financial terminals, automotive, POS, gaming, lottery, medical, HMI, and other specialized industries.
Our
product portfolio comprises medium to large sized projected capacitive touchscreens ranging from 7.0 inch to 42 inch screens. In terms
of the structures of touch panels, we offer (i) Glass-Glass (“GG”), primarily used in GPS/car entertainment panels in mid-size
and luxury cars, industrial HMI, financial and banking terminals, POS and lottery machines; (ii) Glass-Film-Film (“GFF”),
mostly used in high-end GPS and entertainment panels, industrial HMI, financial and banking terminals, lottery and gaming industry; (iii)
Plastic-Glass (“PG”), typically adopted by touchscreens in GPS/entertainment panels motor vehicle GPS, smart home, robots
and charging stations; and (iv) Glass-Film (“GF”), mostly used in industrial HMI.
Maintaining
the industry standards for product quality and sustainability is one of our core values. Touchscreens produced by us not only have long
life span with low maintenance, but also have strong anti-interference and anti-corrosion solutions, coupled with multi-touch capability
and high light-transmittance ratio and stability. As a high technology company, our Mainland China subsidiary has received certifications
from domestic and international institutions, such as ISO9001 Quality Management Systems (QMS) Certification of Registration, ISO 14001
Environmental Management System (EMS) Certification of Registration, and RoHS SGS Certification (Restriction of Hazardous Substance Testing
Certification).
We
generate revenues through sales of our various touchscreen products. For the nine-month periods ended September 30, 2023
and 2022, we recognized approximately $37.3 million and $35.4 million, respectively, in revenues. For the twelve months
ended December 31, 2022 and 2021, we recognized approximately $37.9 million and $40.8 million, respectively, in revenues.
We sell our touchscreen products
both domestically in Mainland China and internationally, covering major areas in China, including but not limited to the eastern, southern,
northern and southwest regions of Mainland China, Taiwan, South Korea, and Germany. We believe that we have established a strong and
diversified client base. For the nine-month periods ended September 30, 2023 and 2022, our domestic sales accounted for
69.2% and 69.2%, respectively, of our revenues, and our international sales accounted for 30.8% and 30.8%,
respectively, of our revenues. For the years ended December 31, 2022 and 2021, our domestic sales accounted for 69.7% and 66.7%,
respectively, of our revenues, and our international sales accounted for 30.3% and 33.3%, respectively, of our revenues.
As
of the date of this prospectus, we have a total of 131 employees. We have no part time employees or independent contractors.
Corporate
History and Structure
We
were originally incorporated under the laws of the state of Nevada on August 31, 1992 as Gulf West Investment Properties, Inc, and were
dormant and had no operations for many years.
On
February 26, 2019, the Eighth Judicial District Court in and for Clark County, Nevada, Case No. A-19-787151-B, appointed Custodian Ventures
LLC, an affiliate of David Lazar, as custodian of the Company (the “Custodian”). Mr. Lazar was appointed as the sole officer
and director of the Company. On March 11, 2019, 1,714,286 shares of common stock of the Company (presented
on a pre-split basis of the 2023 Reverse Stock Split) were issued to the Custodian in consideration for the payment of cash
and the issuance of a promissory note by the Custodian to the Company. Effective as of June 11, 2019, the court discharged the Custodian’s
duties.
On
June 18, 2020, we consummated the transactions contemplated by a Stock Purchase Agreement among the Company, the Custodian, Qixun Samoa
and Qihong Samoa (Qixun Samoa and Qixun Samoa are referred to as the “Buyers”). Pursuant to the Stock Purchase Agreement,
the Buyers acquired all of the 1,714,286 shares of the Company (presented on a pre-split basis
of the 2023 Reverse Stock Split) owned by the Custodian, representing 50.47% of the issued and outstanding shares of the Company.
The Custodian and the Company agreed to indemnify the Buyers from any liabilities of the Company occurring prior to June 18, 2020, and
the promissory note issued by the Custodian to the Company was canceled. Immediately following the closing, David Lazar resigned as the
sole officer and director of the Company and Jiaying Cai was appointed as president, secretary and treasurer of the Company and as the
sole director.
Name
Change/Reverse Stock Split
Effective
September 30, 2020, we changed our name from Gulf West Investment Properties, Inc. to Wetouch Technology Inc. by filing an Amended and
Restated Articles of Incorporation with the Nevada Secretary of State to give effect to a name change. The Amended and Restated Articles
also effectuated a reverse split of our authorized, issued and outstanding shares of common stock on a 70 for 1 new basis whereby each
70 shares of outstanding common stock was exchanged for one (1) share of new common stock (the “Reverse Split” and, for avoidance
of doubt, all share amounts set forth herein shall be post Reverse Split unless otherwise specified) and, consequently, our authorized
common stock increased to 300,000,000 shares of common stock and 10,000,000 shares of preferred stock, and our then issued and outstanding
common shares decreased from 237,742,066 to 3,396,394 shares, all with a par value of $0.001 (presented
on a pre-split basis of the 2023 Reverse Stock Split). All share and per share numbers relating to our common stock prior
to the effectiveness of the Reverse Split have been adjusted to give effect to the Reverse Split.
As
a result of the name change, we changed our trading symbol from “GLFW” to “WETH,” effective November 3, 2020.
Acquisition
of BVI Wetouch
On
October 9, 2020, we entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with BVI Wetouch and all of
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 an aggregate of 28,000,000
shares (presented on a pre-split basis of the 2023 Reverse Stock Split) of our common
stock. In the Reverse Merger, each ordinary share of BVI Wetouch was exchanged for 560 shares of common stock of Wetouch (presented
on a pre-split basis of the 2023 Reverse Stock Split). Immediately after the closing of the Reverse Merger on October 9, 2020,
we had a total of 31,396,394 issued and outstanding shares of common stock (presented on a pre-split
basis of the 2023 Reverse Stock Split). As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned subsidiary.
On
October 12, 2020, Guangde Cai was appointed as an additional director and Chairman of the Company. On October 12, 2020, Mr. Zongyi Lian
was appointed as president and chief executive officer of the Company, and Mr. Yuhua Huang was appointed as chief financial officer of
the Company. On the same day, Jiaying Cai resigned from the capacity of president and treasurer of the Company, but remains the secretary
and director of the Company.
BVI
Wetouch was established under the laws of British Virgin Islands on August 14, 2020 to acquire all the shares of Hong Kong Wetouch Electronics
Technology Limited (“Hong Kong Wetouch”). On September 11, 2020, BVI Wetouch acquired all the outstanding shares of Hong
Kong Wetouch from the shareholders of Hong Kong Wetouch in consideration of HK$10,000 pursuant to instruments of transfer in accordance
with Hong Kong law. As a result of the acquisition, Hong Kong Wetouch became a wholly-owned subsidiary of BVI Wetouch. The shareholders
of Hong Kong Wetouch became the shareholders of BVI Wetouch in said transaction, and therefore the shareholders who controlled Hong Kong
Wetouch became the controlling shareholders of BVI Wetouch.
Hong
Kong Wetouch was incorporated on May 5, 2016 under the laws of Hong Kong. On July 19, 2016, Hong Kong Wetouch acquired all the shares
of Sichuan Wetouch, a Mainland China company established in Meishan, Sichuan on May 6, 2011. As a result of the acquisition, Sichuan
Wetouch became a wholly owned subsidiary of Hong Kong Wetouch.
As
BVI Wetouch owns all the outstanding shares of Hong Kong Wetouch, which, in turn, owns all the outstanding shares of Sichuan Wetouch,
the Company owns indirectly all the business of Sichuan Wetouch. As a result of the Reverse Merger in which the Company acquired all
the outstanding shares of BVI Wetouch, Hong Kong Wetouch and Sichuan Wetouch became our indirect wholly-owned subsidiaries.
Hong
Kong Wetouch Technology Limited, a limited company organized under the laws of Hong Kong (“HK Wetouch”), an affiliate of
Guangde Cai, our former 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 Vtouch Technology Co., Ltd., which was incorporated on December 30, 2020 (“Sichuan
Vtouch”) in Chengdu, Sichuan, under PRC laws.
On
March 12, 2021, Wetouch Holding Group Limited (“BVI Wetouch”), the Company’s wholly owned subsidiary, 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 Hong Kong Wetouch, which, in turn, owns all the outstanding
shares of Sichuan Wetouch and (ii) all of the outstanding shares of HK Wetouch, which owns all the shares of Sichuan Vtouch.
Recent
Developments
Pursuant
to local PRC government guidelines on local environmental issues and the national overall plan, Sichuan Wetouch is under the government-directed
relocation order to relocate and received compensation accordingly. As a result, on March 16, 2021, Sichuan Wetouch entered into
an Agreement of Compensation on Demolition (“Compensation Agreement”) with Meishan Huantian Industrial Co., Ltd, formerly
named 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, China. 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.
In
order to minimize the interruption of our business, Sichuan Vtouch 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), which period was extended to October 31, 2022. On October
16, 2022, Sichuan Vtouch entered an extension to the Leaseback Agreement with Sichuan Renshou to
extend the period it granted Sichuan Vtouch to lease back the Properties until October 31,
2023, then subsequently extended to October 31, 2024, at a monthly rent of RMB400,000 (approximately $59,941).
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, 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).
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 prospectus, 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 October 31, 2024, but there is no assurance and we may need
extended time to achieve our business plan. Thus, 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 October 31, 2023 and was compensated
RMB115.2 million ($17.8 million) by the local government 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.
On
March 2, 2021, HK Wetouch acquired all shares of Hong Kong Wetouch. Hong Kong Wetouch submitted its application for dissolution and
was dissolved on March 18, 2022. In addition, as of March 31, 2021, Sichuan Wetouch’s business and operations have been assumed
by Sichuan Vtouch.
The
following diagram illustrates our current corporate structure:
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_002.jpg)
SEC
Filing Obligations
We
became subject to the filing requirements of the Securities Exchange Act of 1934, as amended, as a result of our Form 10 being declared
effective by the Securities and Exchange Commission (the “Commission”) on December 11, 2020.
We
filed a Form S-1 registration statement with respect to the resale by 44 selling stockholders identified in the prospectus for an aggregate
of 15,889,371 shares of common stock of the Company (presented on a pre-split basis of the 2023
Reverse Stock Split). The registration statement was declared effective by the Commission on January 7, 2021 (Registration
No. 333-251845).
Listing
on OTCQB Market
On
February 15, 2021, we applied to the OTC Markets to have our shares quoted on the OTCQB, which was approved on March 26, 2021. Effective
March 29, 2021, our shares started trading on OTCQB under the symbol “WETH.”
Listing
on the Nasdaq Capital Market
Our common stock was previously
quoted on the OTCQB under the symbol “WETH.” In connection with this Underwritten Offering, we were approved to list our
common stock on the Nasdaq Capital Market (“Nasdaq”) under the symbol “WETH.”
We
filed a Certificate of Change on September 7, 2023 with the Secretary of State of the State of Nevada to effectuate a 1-for-20 reverse
stock split of our outstanding common stock, with the number of authorized shares of common stock reduced ratably (the “2023 Reverse
Stock Split”). On September 11, 2023, the Financial Industry Regulatory Authority (“FINRA”) notified us that the 2023
Reverse Stock Split will become effective on the OTCQB marketplace of OTC Markets on September 12, 2023. The
2023 Reverse Stock Split was effective as of the opening of trading on September 12, 2023 and the Company’s shares of common
stock continued trading on the OTCQB marketplace under the symbol “WETHD” for a period of 20 business days, and thereafter,
the symbol will return to “WETH”.
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 the first quarter of 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.
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.
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. The Company experienced several shutdowns until the end of 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 prospectus, our Mainland China Subsidiary has resumed normal operations.
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. The Company has taken proactive measures to promote
products to new customers and entering more regions. 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, including the
duration and spread of the outbreak and the impact on the Company’s customers, which are still uncertain and cannot be reasonably
estimated at this point of time.
Competitive
Strengths
We
are dedicated to the production of high quality products that are tailored to customers’ requirements and commercial needs. Our
competitive strengths include:
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Our
economy of scale lowers our cost and appeals to big clients with large quantity purchase orders; |
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Our
Mainland China subsidiary’s centralized manufacturing facility enables Sichuan Vtouch to produce all different products
within the same location with batch consistency and quality assurance; |
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Our
proprietary technology allows Sichuan Vtouch to produce touchscreens with high light-transmittance ratio and stability, low
maintenance with minimal or no need of recalibration after production, long life span, anti-interference, anti-corrosion and multi-touch
capability, supporting up to 20 points of contact with the screen and 20 gestures, and in different structures and sizes for a wide
range of different applications. |
Our
Growth Strategies
We
will continue to adhere to our business principles of providing high quality and safe products to our consumers and promoting social
responsibility. We believe that our pursuit of these goals will lead to sustainable growth driven by our Mainland China subsidiary’s
capacity expansion based on market demand, solidify our position in the industry, and create long-term value for our shareholders, employees
and other stakeholders.
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Improve
existing technology. We intend to improve our existing technology and occupy more market share. Our products are categorized
into the following three main structures: GG (Glass + Glass), GFF (Glass + Film + Film), and PG (Plastic Glass). GG is mainly used
in the automobile and banking and finance industries. We plan to make technological improvements on GG structure and mainly focus
on improving its production capability and delivering quality products for brand customers. GFF is mostly applied in industrial HMI
and lottery and gaming industries. We plan to continue to concentrate on high-end industrial HMI products. PG is primarily employed
in smart home, robotics and charging stations industries. We plan to upgrade the production line of PG to improve its production
capability and create greater adaptability to changes in product size. We have developed the industry 4.0 intelligent system, which
is still under testing as of the date of this prospectus. Upon successfully passing the testing phase and registering the patent,
we plan to apply it to various manufacturing industries. As of the date of this prospectus, we have sufficient funds to effectuate
our plans. |
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Solidify
our industry position by gaining additional market share. Our goal is to strengthen our market position and accelerate our
expansion by expanding our scale and gaining additional market share. We plan to increase investment in our business and expand our
production capacity through horizontal or vertical acquisitions, strategic partnerships and joint ventures. We plan to invest additional
capital in technology research and development and acquiring new equipment to increase production capacity. In addition, we plan
to participate in more expos or exhibitions domestically and internationally. With more exposure and promotion, we believe our product
and brand will be better recognized. Currently we have no agreements or letters of intent for any acquisitions, partnerships or ventures. |
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Uphold
our commitment to product quality. We intend to uphold our commitment to product quality to ensure consistently high standards
throughout our operations. We intend to achieve greater traceability of our products and maintain the highest quality standards in
all of our business units. To this end, we plan to continue to maintain our quality monitoring systems across the entire operation
by strictly selecting suppliers and meeting clients’ technology requirements, closely monitoring quality, keeping records of
everyday operations, and complying with national and local laws and regulations on product quality, employees, and environment sustainability.
We believe such practice largely conforms with the industry’s best practices in Mainland China. |
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Expand
our sales and distribution network. We hope to expand our sales and distribution network to penetrate new geographic markets,
further gaining market share in existing markets and accessing a broader range of customers. We will continue to expand our sales
network, leveraging our local resources to quickly enter new markets, while also minimizing requirements for capital outlay. We plan
to focus on brand clients and concentrate on high-end industry such as industrial HMI, banking and finance, medical instruments,
military, aviation, and POS and increase our presence in both new and existing markets. |
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Enhance
our ability to attract, incentivize and retain talented professionals. We believe our success greatly depends on our ability
to attract, incentivize and retain talented professionals. With a view to maintaining and improving our competitive advantage in
the market, we plan to implement a series of initiatives to attract additional and retain mid- to high-level personnel, including
formulating a market-oriented employee compensation structure and implementing a standardized multi-level performance review mechanism. |
Competition
The
markets for touchscreen products are highly competitive and subject to rapid technological change. We believe that the principal competitive
factors in its markets are product characteristics such as touch performance, durability, optical clarity and price, as well as supplier
characteristics such as quality, service, delivery time and reputation. We believe that we compete favorably with respect to these factors,
although there can be no assurance that the Company will be able to continue to compete successfully in the future.
Despite
that touchscreen products are highly competitive as a whole, we face fewer competitors, as we produce medium to large size touchscreens
which are specially tailored to certain industries, such as industrial HMI, gaming, financing, lottery, automotive, medical, and POS,
among others, and require more stable supply and longer guaranty and life span, compared with small size touchscreens, which are characterized
by shorter life cycles and guaranty but more demand in quantity.
We
believe the following companies may be our competitors:
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Apex
Material Technology Corp., founded in 1998, is committed to the development and innovation of resistive and projected capacitive
(PCI or PCAP) total touch solutions. With its headquarter based in Keelung, Taiwan and a subsidiary located in Milwaukee, Wisconsin,
it designs and manufactures advanced high-performance touch products for industrial and medical applications. Compared with us, although
it has a longer history and geographical advantages, it mainly focuses on resistive touch panels and recently started production
of capacitive touchscreens mostly applicable to the industrial HMI and medical industries, while our products are more widely used
in a variety of industries. |
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Elo
Touch Systems Inc., based and headquartered in the United States, has a history of over 40 years for the production of touchscreens.
Its product portfolio includes a broad selection of interactive touchscreen displays from 10-70 inches, all-in-one touchscreen computers,
OEM touchscreens and touchscreen controllers and touchscreen monitors. Compared with us, although it has a longer history and geographical
advantages when it comes to the competition for U.S. customers and other international customers, it recently started the production
of capacitive touchscreens mostly applicable to POS and inquiry machines, while our products are more widely used in a variety of
industries. |
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AbonTouch
System Inc, established in 2005, mainly focuses on manufacturing and sales of mid to large size (7”~86”) “Projective
Capacitive Sensors,” (7”~21.5”) “Five-Wire Resistive Zero-Bezel Touch Panels” and (5”~21.5”)
“Five-Wire Resistive Touch Panels.” Compared with us, although it has a longer history and geographical advantages, it
mainly focuses on resistive touch panels and recently started production of capacitive touchscreens mostly applicable to POS, inquiry
machines and industrial HMI, while our products are more widely used in a variety of industries. |
Risk
Factors Summary
Our
business is subject to a number of risks. You should be aware of these risks before making an investment decision. These risks are discussed
more fully in the section of this registration statement titled “Risk Factors”. These risks include, among others, the following:
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The
current COVID-19 pandemic, as well as other epidemics, natural disasters, terrorist activities, political unrest, and other outbreaks
could disrupt our delivery and operations, which could materially and adversely affect our business, financial condition, and results
of operations. |
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We
are heavily dependent on our top customers. If we fail to acquire new customers or retain existing customers in a cost-effective
manner, our business, financial condition and results of operations may be materially and adversely affected. |
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We
have a significant amount of accounts receivable, which could become uncollectible. |
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Failure
to maintain the quality and safety of our products could have a material and adverse effect on our reputation, financial condition
and results of operations. |
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We
face intense competition in the touchscreen industry in general. If we fail to compete effectively, we may lose market share and
customers, and our business, financial condition and results of operations may be materially and adversely affected. |
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If
we do not obtain substantial additional financing, our ability to execute on our business plan as outlined in this prospectus will
be impaired. |
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Failure
to secure a new piece of parcel for the construction of our new buildings and facilities, and failure to acquire and install new
production lines on the new parcel, our business, financial condition and results of operations may be materially and adversely affected. |
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Any
adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated
net income and the value of your investment. |
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If
our preferential tax treatments and government subsidies are revoked or become unavailable or if the calculation of our tax liability
is successfully challenged by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax
provisions. |
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A
significant interruption in the operations of our third-party suppliers could potentially disrupt our operations. |
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We
face the risk of fluctuations in the cost, availability and quality of our raw materials, which could adversely affect our results
of operations. |
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We
are dependent upon key executives and highly qualified managers and we cannot assure their retention. |
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We
do not have long-term contracts with our suppliers and they can reduce order quantities or terminate their sales to us at any time. |
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If
we fail to adopt new technologies to evolving customer needs or emerging industry standards, our business may be materially and adversely
affected. |
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We
may experience significant liability claims or complaints from customers, or adverse publicity involving our products and our services. |
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PRC
regulations relating to the establishment of offshore special purpose companies by Mainland China residents may subject our
Mainland China resident beneficial owners or our Mainland China subsidiary to liability or penalties, limit our ability
to inject capital into our Mainland China subsidiary, limit our Mainland China subsidiary’ ability to increase
their registered capital or distribute profits to us, or may otherwise adversely affect us. |
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We
have no business liability or disruption insurance, which could expose us to significant costs and business disruption. |
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We
may incur liabilities that are not covered by insurance. |
We are a Nevada
holding company with operations conducted by our subsidiary based in Mainland China and we may face risks and uncertainties in
doing business in China (See “Risk Factors — Risks Related to Doing Business in China”), including:
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Adverse
regulatory developments in Mainland China may subject us to additional regulatory review and expose us to government restrictions,
and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory
developments in Mainland China may impose additional compliance requirements for companies with significant Mainland China-based
operations, all of which could increase our compliance costs, subject us to additional disclosure requirements, and/or suspend
or terminate our future securities offerings, making capital-raising more difficult. |
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Upon
the effectiveness of the Trial Administrative Measures, we could be subject to the Trial
Administrative Measures, as the Company has: (i) 50% or more of the issuer’s operating
revenue, total profit, total assets or net assets as documented in its audited consolidated
financial statements for the most recent accounting year is accounted for by Mainland
China domestic companies; and (ii) the main parts of the issuer’s business activities
are conducted in Mainland China, or its main places of business are located in Mainland
China, or the senior managers in charge of its business operation and management are
mostly Chinese citizens or domiciled in Mainland China; and, if required, we cannot
assure you that we will be able to complete such process on time or at all. |
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Our
common stock will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA,
if it is later determined that the PCAOB is unable to inspect and investigate completely our auditor. The delisting of and prohibition
from trading our common stock, or the threat of their being delisted and prohibited from trading, may cause the value of our common
stock to significantly decline or be worthless. |
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Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and operations. The PRC government has recently indicated an intent to exert more oversight and control over overseas securities
offerings and other capital markets activities and foreign investment in Mainland China-based companies like us. Any such
action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer
securities to investors and cause the value of such securities to significantly decline or in extreme cases, become worthless. |
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Uncertainties
with respect to the PRC legal system, including uncertainties regarding the enforcement of
laws and sudden and unexpected changes in laws and regulations in Mainland China,
could adversely affect us and limit the legal protections
available to you and us. |
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You
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in Mainland
China against us or our management based on foreign laws. |
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Fluctuations
in exchange rates could have a material and adverse effect on our results of operations and the value of your investment. |
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Governmental
control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment. |
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Certain
political and economic considerations relating to the PRC could adversely affect our Company. |
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The
Chinese government exerts substantial influence over the manner in which we must conduct our business activities and may intervene
or influence our operations at any time, which could result in a material change in our operations and/or the value of our common
stock. |
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The
PRC government may issue further restrictive measures in the future. |
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Interpretation
of PRC laws and regulations involve uncertainty. |
Recent Regulatory Developments
We
face various legal and operational risks and uncertainties related to being based in and having all of our operations in Mainland
China. The PRC government has significant authority to exert influence on the ability of a company with Mainland China-based
operations, such as us, to conduct its business, accept foreign investments or list on an U.S. or other foreign exchanges. For example,
we face risks associated with regulatory approvals of offshore offerings, anti-monopoly regulatory actions, as well as oversight on cybersecurity
and data privacy. Such risks or any actions by the PRC government to exert more oversight and control over offerings that are conducted
overseas and/or foreign investment in issuers with Mainland China-based operations could result in a material change in our operations
and/or the value of our common stock or could significantly limit or completely hinder our ability to offer or continue to offer our
common stock and/or other securities to investors and cause the value of such securities to significantly decline or be worthless. In
addition, the PRC government has significant authority, oversight and discretion over the conduct of our business and may intervene with
or influence the operations of our Mainland China subsidiary as the government deems appropriate to further regulatory, political
and societal goals. The PRC government has recently published new policies that significantly affected certain industries such as the
education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies
regarding our industry that could adversely affect our business, financial condition and results of operations. Furthermore, the PRC
government has recently indicated an intent to exert more oversight and control over overseas securities offerings and other capital
markets activities and foreign investment in companies with Mainland China-based operations like us. Any such action, once taken
by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors
and cause the value of such securities to significantly decline or in extreme cases, become worthless. For a detailed description of
risks related to doing business in China, see “Risk Factors — Risks Related to Doing Business in China.”
On July 6, 2021, the relevant
PRC government authorities published the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law.
These opinions call for strengthened regulation over illegal securities activities and supervision on overseas listings by Mainland
China-based companies and propose to take effective measures, such as promoting the construction of relevant regulatory systems to
deal with the risks and incidents faced by Mainland China-based overseas-listed companies. On December 24, 2021, the CSRC released
the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises
(Draft for Comments) (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities and
Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”, together with the Draft
Administrative Provisions, the “Draft Rules”). The Draft Rules lay out the filing regulations for both direct and indirect
overseas listings and clarify the determination criteria for indirect overseas listings in overseas markets. Among other requirements,
if a domestic enterprise intends to indirectly offer and list securities in an overseas market, the record-filing obligation shall be
completed within three working days after the overseas listing application is submitted. On February 17, 2023, the CSRC promulgated the
Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Administrative Measures”),
which took effect on March 31, 2023. The Trial Administrative Measures further stipulate the rules and requirements for overseas
offering and listing conducted by Mainland China domestic companies. Our PRC counsel has advised that because our common stock
currently trades in the U.S., we are not required to submit filings to the CSRC before this offering is completed and this offering is
not conditioned on CSRC approval. Rather, within three days of the closing of this offering, we must submit filings to the CSRC in accordance
with the Trial Administrative Measures. However, given that the Trial Administrative Measures were recently promulgated, there remain
substantial uncertainties as to their interpretation, application, and enforcement and there is no guarantee that the relevant PRC government
agencies, including the CSRC, would reach the same conclusion that we and our PRC counsel have reached. In addition, if we were to fail
to comply with the post-offering filing obligations imposed by the Trial Administrative Measures or make a misrepresentation, misleading
statement or material omission in the materials we submit to the CSRC, the CSRC would have the right to order rectification, issue
a warning and impose a fine on us of between RMB 1 million and RMB 10 million and issuing a warning to the parties responsible
for such failure, misrepresentation or material omission and impose a fine on each of such individuals ranging from RMB 500,000 to RMB
5 million. See “Risk Factors — Risks Related to Doing Business in China.”
On
February 24, 2023, the CSRC, together with the Ministry of Finance, National Administration of State Secrets Protection and National
Archives Administration of China, revised the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities
Offering and Listing, which were issued by the CSRC and National Administration of State Secrets Protection and National Archives Administration
of China in 2009, or the “Provisions.” The revised Provisions were issued under the title the “Provisions on Strengthening
Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies,” and came into effect
on March 31, 2023 together with the Trial Administrative Measures. One of the major revisions to the revised Provisions is expanding
their application to cover indirect overseas offering and listing, as is consistent with the Trial Administrative Measures. The revised
Provisions require that, among other things, (a) a domestic company that plans to, either directly or indirectly through its overseas
listed entity, publicly disclose or provide to relevant individuals or entities, including securities companies, securities service providers,
and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first
obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level; and
(b) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide
to relevant individuals and entities, including securities companies, securities service providers, and overseas regulators, any other
documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant
procedures stipulated by applicable national regulations. Any failure or perceived failure by our Company, or our subsidiary in Mainland
China to comply with the above confidentiality and archives administration requirements under the revised Provisions and other PRC laws
and regulations may result in the relevant entities being held legally liable by competent authorities, and referred to the judicial
organ to be investigated for criminal liability if suspected of committing a crime.
In addition, on July 10, 2021,
the Cyberspace Administration of China issued the Measures for Cybersecurity Review (Revision Draft for Comments), or the Measures, for
public comments, which propose to authorize the relevant government authorities to conduct cybersecurity review on a range of activities
that affect or may affect national security, including listings in foreign countries by companies that possess the personal data of more
than one million users. On December 28, 2021, the Measures for Cybersecurity Review (2021 version) were promulgated and became
effective on February 15, 2022 (the “Measures”), which iterates that any “online platform operators” controlling
personal information of more than one million users that seeks to list on a foreign stock exchange shall also be subject to cybersecurity
review. As we are neither an “operator of critical information infrastructure” nor a “data processor” carrying
out data processing activities that affect or may affect national security, we believe that the Measures are not applicable to us even
after they take effect in current form. The PRC government is increasingly focused on data security, recently launching cybersecurity
review against a number of mobile apps operated by several US-listed Chinese companies and prohibiting these apps from registering new
users during the review period. There are great uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations
regarding data and privacy security. We may be required to change our data and other business practices and be subject to regulatory
investigations, penalties, and increased cost of operations as a result of these laws and policies. See “Risk Factors — Risks
Related to Doing Business in China.”
For its operations, Sichuan Vtouch
holds the required business license issued by the Wenjiang District Market Supervision Administration of Chengdu and has been registered
with the Sichuan Provincial Development and Reform Commission for foreign investment projects in Sichuan Province. Sichuan Vtouch has
also registered with the Jincheng Customs of the People’s Republic of Mainland China customs subordinate to Chengdu Customs
for the record and registration of imported and exported goods.
Our business in Mainland China
is subject to various pollution control regulations in Mainland China with respect to noise, water and air pollution and the
disposal of waste. Specifically, the major environmental regulations applicable to us include the PRC Environmental Protection Law, the
PRC Law on the Prevention and Control of Water Pollution, the PRC Law on the Prevention and Control of Air Pollution, the PRC Law on
the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. Our Mainland
China subsidiary originally received the Pollutant Discharge Permit from Renshou County environmental protection agency, which expired
on May 15, 2019. Pursuant to a Statement on Change of Pollutant Discharge Permit to Stationary Pollution Source Registration Form dated
September 1, 2020, the environmental protection system in Renshou County, Sichuan, was changed from permission to registration due to
local administrative division changes. Therefore, upon submission of all required documentation, our Mainland China subsidiary
is registered under the new system by issuance of the Stationary Pollution Source Registration Form.
We believe that we and our
subsidiaries have received all requisite permissions from Chinese authorities to operate our business, with material permissions and
approvals comprising the business license issued by the Wenjiang District Market Supervision Administration of Chengdu to our Mainland
China operating subsidiary Sichuan Vtouch, the registration of Sichuan Vtouch under the Stationary Pollution Source Registration Form,
and the regulations stated in the “Regulations” section on page 67 of this prospectus, and no such permissions have been
denied. As of the date of this prospectus, we are not aware of any PRC laws or regulations in effect requiring that we or our subsidiary
in Mainland China obtain permission from any PRC authorities to offer securities being registered to foreign investors, other than the
filing requirements under the Trial Administrative Measures, and we have not received any inquiry, notice, warning, or sanction from
the CSRC or any other PRC authorities that have jurisdiction over our operations. If we or our subsidiaries do not receive or maintain
such permissions or approvals, inadvertently conclude that such permissions or approvals are not required, or applicable laws, regulations,
or interpretations change and we are required to obtain such permissions or approvals in the future, we may incur significant costs and
delays in attempting to obtain such approvals or, if we are unable to obtain such approvals, we may not be able to continue listing on
U.S. exchanges nor continue to offer securities to investors, which could materially affect the interest of the investors and cause the
value of our securities to significantly decline or become worthless. See “Regulations” on page 67 and “Risk Factors — Risks
Related to Doing Business in China — Adverse regulatory developments in Mainland China may subject us to additional regulatory
review and expose us to government restrictions, and additional disclosure requirements and regulatory scrutiny to be adopted by the
SEC in response to risks related to recent regulatory developments in Mainland China may impose additional compliance requirements for
companies with significant Mainland China-based operations, all of which could increase our compliance costs, subject us to additional
disclosure requirements, and/or suspend or terminate our future securities offerings, making capital-raising more difficult”
on page 17.
The
Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020 and amended by the Consolidated Appropriations
Act, 2023 enacted on December 29, 2022. The amended HFCAA states if the SEC determines that we have filed audit reports issued by a registered
public accounting firm that has not been subject to inspection by the PCAOB for two consecutive years, the SEC shall prohibit our shares
from being traded on a national securities exchange or in the over-the-counter trading market in the United States. The Consolidated
Appropriations Act, 2023 reduced the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA
from three years to two years. On December 16, 2021, the PCAOB issued its report notifying the SEC of its determination that it was unable
to inspect or investigate completely registered public accounting firms headquartered in mainland China or Hong Kong. Our auditor, B
F Borgers CPA PC, is an independent registered public accounting firm headquartered in the United States. Our auditor is currently subject
to PCAOB inspections and has been inspected by the PCAOB on a regular basis. On December 15, 2022, the PCAOB issued a report that vacated
its December 16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect
or investigate completely registered public accounting firms.
Each
year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other
jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting
firms in mainland China and Hong Kong and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report
on our financial statements filed with the SEC, we would be identified as a “Commission-Identified Issuer” following the
filing of the annual report on Form 10-K for the relevant fiscal year. There can be no assurance that we would not be identified as a
“Commission-Identified Issuer” for any future fiscal year, and if we were so identified for two consecutive years, we would
become subject to the prohibition on trading under the HFCAA. The delisting of our common stock, or the threat of their being delisted,
may materially and adversely affect the value of your investment. These risks could result in a material adverse change in our operations
and the value of our common stock, significantly limit or completely hinder our ability to offer or continue to offer securities to investors,
or cause the value of such securities to significantly decline or become worthless. See
“Risk Factors—Risks Related to Doing Business in China— Our common stock will be prohibited from trading in the
United States under the Holding Foreign Companies Accountable Act, or the HFCAA, if it is later determined that the PCAOB is unable to
inspect and investigate completely our auditor. The delisting of and prohibition from trading our common stock, or the threat of their
being delisted and prohibited from trading, may cause the value of our common stock to significantly decline or be worthless.”
Transfer of Cash and Other Assets
We, as an offshore holding
company, are permitted under PRC laws and regulations to provide funding to our Mainland China subsidiary only through loans or
capital contributions. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company
loans to our Mainland China subsidiary or make additional capital contributions to our Mainland China subsidiary to fund
their capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or
approvals on a timely basis, if at all. In addition, although we currently intend to retain most, if not all, of our available funds
and any future earnings to fund the development and growth of our business, and we do not expect to pay any cash dividends in the foreseeable
future, we may rely on dividends and other distributions on equity paid by our Chinese subsidiaries for our cash and financing requirements.
Our Mainland China subsidiary may be permitted to pay dividends only out of its accumulated profits. However, such Mainland
China subsidiary is required to set aside at least 10% of its after-tax profits each year, after making up for previous year’s
accumulated losses, if any, to fund certain statutory reserves, until the aggregate amount of such funds reaches 50% of its registered
capital. This portion of such Mainland China subsidiary’s respective net assets are prohibited from being distributed to
its shareholders as dividends.
Renminbi is not freely convertible
into other currencies. As result, any restriction on currency exchange may limit the ability of our Chinese subsidiaries to use their
potential future renminbi revenues to pay dividends to us. The Chinese government imposes controls on the convertibility of renminbi
into foreign currencies and, in certain cases, the remittance of currency out of Mainland China. Shortages in availability of
foreign currency may then restrict the ability of our Chinese subsidiaries to remit sufficient foreign currency to our offshore entities
for our offshore entities to pay dividends or make other payments or otherwise to satisfy our foreign-currency-denominated obligations.
The Chinese government may continue to strengthen its capital controls, and additional restrictions and substantial vetting processes
may be instituted by SAFE for cross-border transactions. Any existing and future restrictions on currency exchange may limit our ability
to utilize revenue generated in renminbi to pay dividends in foreign currencies to holders of our securities. This could affect our ability
to obtain foreign currency through debt or equity financing for our subsidiaries.
Additionally, a 10% Mainland
China withholding tax is applicable to dividends payable to investors that are non-resident enterprises. Any gain realized on the
transfer of securities by such investors is also subject to Mainland China tax at a current rate of 10%, which, in the case of
dividends, will be withheld at source if such gain is regarded as income derived from sources within Mainland China. Further,
if any of our Chinese subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict their
ability to pay dividends to us.
To date, there have not been
any cash flows, transfers of other assets, dividends or other distributions among us and any of our subsidiaries. As of the date of this
prospectus, neither we nor any of our subsidiaries have ever paid dividends or made distributions to U.S. investors. In the future, cash
proceeds raised from overseas financing activities, including this Underwritten Offering, may be transferred by us to our Chinese subsidiaries
via capital contribution or loans, as the case may be. As of the date of this prospectus, Wetouch, BVI Wetouch, HK Wetouch and Sichuan
Vtouch have not adopted or maintained any cash management policies and procedures that dictate how funds are transferred.
Corporate
Information
We
are incorporated under the laws of Nevada. Our principal executive offices are located at No. 29, Third Main Avenue, Shigao Town, Renshou
County, Meishan, Sichuan, China. Our telephone number is (86) 028-37390666. Our websites are www.wetouchinc.com and www.wetouch.com.cn,
the latter of which is only accessible in Mainland China. Information contained in, or that can be accessed through, our websites
is not incorporated by reference into this registration statement, and you should not consider information on our websites to be part
of this registration statement.
THE
OFFERING
Issuer |
|
Wetouch
Technology Inc. |
|
|
|
Common
stock outstanding prior to the Underwritten Offering |
|
9,732,948
shares |
|
|
|
Common
stock offered by us in the Underwritten Offering |
|
2,160,000
shares of our common stock (2,484,000
shares if the underwriters exercise their over-allotment option in full). |
|
|
|
Offering
price for shares sold in the Underwritten Offering |
|
$5.00
per share |
|
|
|
Over-allotment
option |
|
The
underwriters have an option for a period of 45 days to purchase up to 324,000 additional shares of our common stock (15% of
the number of shares sold in the Underwritten Offering) to cover over-allotments, if any, at the public offering price, less underwriting
discounts and commissions. |
Common
stock outstanding after completion of the Underwritten Offering |
|
11,892,948
shares. (12,216,948 shares if the underwriters exercise their over-allotment option in full). |
|
|
|
Common
Stock issuable upon the exercise of Underwriter’s Warrants |
|
The
registration statement of which this prospectus is a part also registers for sale common stock underlying warrants (the “Underwriter’s
Warrants”) to purchase up to 49,680 shares issuable to the Representatives, which is equal to 2.0% of the number of
shares sold in the Underwritten Offering (assuming the full exercise of the over-allotment option by the underwriters), as a portion
of the underwriting compensation payable to the Representatives in connection with the Underwritten Offering. The Underwriter’s
Warrants will be exercisable at any time, and from time to time, in whole or in part, during the four and one-half year period commencing
180 days following the date of commencement of sales of the Underwritten Offering at an exercise price of $6.25 (125.0% of
the public offering price per share). |
|
|
|
Lock-up
Agreements |
|
We
and our directors, officers and certain principal shareholders have agreed with the Underwriter not to offer for sale, issue, sell, contract
to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock for a period of 180 days
after the date of this prospectus. See “Underwriting – Lock-Up Agreements.”
|
|
|
|
Use
of proceeds |
|
We
intend to use the net proceeds from the Underwritten Offering after deducting the estimated underwriting discounts and estimated offering
expenses for repaying the outstanding amounts of convertible promissory notes, sales and marketing activities, product development,
and capital expenditures, and we may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions
or businesses that complement our business, and for working capital and general corporate purposes. See “Use
of Proceeds” on page 30 of this prospectus. |
|
|
|
OTCQB
Symbol |
|
WETH |
|
|
|
Nasdaq Symbol |
|
WETH |
|
|
|
Risk
factors |
|
Investing
in our securities involves a high degree of risk. See “Risk Factors” beginning on page 12. |
Unless
we indicate otherwise, the number of shares of our common stock that will be outstanding immediately after the Underwritten Offering
is based on 9,732,948 shares of common stock outstanding as of February 9, 2024. The number excludes the following:
|
(i) |
shares of common stock issuable upon the conversion of
outstanding convertible notes and the
exercise of outstanding common stock purchase warrants; |
|
(ii) |
shares of common stock underlying the warrants to be issued
to the Representatives in connection with this Underwritten Offering. |
Except
as otherwise indicated herein, all information in this prospectus assumes no exercise by the underwriter of its over-allotment option
to purchase additional shares.
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. Before investing in our common stock, you should carefully consider the risks described
below, as well as the other information in this prospectus, including our consolidated financial statements and the related notes. In
addition, we may face additional risks and uncertainties not currently known to us, or which as of the date of this registration statement
we might not consider significant, which may adversely affect our business. If any of the following risks occur, our business, financial
condition and results of operations could be materially adversely affected. In such case the trading price of our common stock could
decline due to any of these risks or uncertainties, and you may lose part or all of your investment.
Risks
Related to Our Business and Industry
The
current COVID-19 pandemic, as well as other epidemics, natural disasters, terrorist activities, political unrest, and other outbreaks
could disrupt our delivery and operations, which could materially and adversely affect our business, financial condition, and results
of operations.
The
current COVID-19 pandemic adversely affected many aspects of our business, including production, supply chain, and sales and delivery
in 2020. Our Mainland China subsidiary’s manufacturing facility underwent temporary yet prolonged closure in February 2020 as part
of Mainland China’s nationwide efforts to contain the spread of the novel coronavirus. Commencing in the spring of 2021, China
began to experience an increase in COVID-19 cases, and to some extent, local government 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. The
Company experienced several shutdowns until the end of 2022.
Even though our business
is currently operational, our Mainland China subsidiary’s production capacity, delivery, warranty services including after-sale
services and technical support, and operational efficiency are still adversely affected by the COVID-19 pandemic due to insufficient
workforce in production, sales, and delivery as a result of temporary travel restrictions in Mainland China and the necessity
to comply with disease control protocols in our business establishments and manufacturing facility. Our suppliers’ abilities to
timely deliver raw materials, parts and components, or other services were also adversely affected for similar reasons. The global spread
of COVID-19 may also affect our overseas sales. As a result of varying levels of travel and other restrictions for public health concerns
in various regions of Mainland China, our Mainland China subsidiary also temporarily postponed the delivery of our products
to our customers. While the duration of the impact of the pandemic on our business and related financial impacts cannot be reasonably
estimated at this time, our results of operations for the first half of 2020 were adversely affected with potential continuing impact
on subsequent periods. In addition, further outbreaks of the COVID-19 pandemic may adversely affect our Mainland China subsidiary’s
manufacturing ability, our Mainland China subsidiary’s delivery and after-sale services in Mainland China. COVID-19
has had a global economic impact on the financial markets. The global spread of COVID-19 pandemic may result in global economic distress,
and the extent to which it may affect our results of operations will depend on future developments, which are highly uncertain and cannot
be predicted. We cannot assure you that the COVID-19 pandemic can be eliminated or contained in the near future, or at all, or a similar
outbreak will not occur again. If the COVID-19 pandemic and the resulting disruption to our business were to extend over a prolonged
period, it could materially and adversely affect our business, financial condition, and results of operations.
In addition, global pandemics,
epidemics in Mainland China or elsewhere in the world, or fear of spread of contagious diseases, such as Ebola virus disease (EVD),
Middle East respiratory syndrome (MERS), severe acute respiratory syndrome (SARS), H1N1 flu, H7N9 flu, and avian flu, as well as hurricanes,
earthquakes, tsunamis, or other natural disasters could also disrupt our business operations, reduce or restrict our supply of products
and services, incur significant costs to protect our employees and facilities, or result in regional or global economic distress, which
may materially and adversely affect our business, financial condition, and results of operations. Actual or threatened war, terrorist
activities, political unrest, civil strife, and other geopolitical uncertainty could have a similar adverse effect on our business, financial
condition, and results of operations. Any one or more of these events may impede our production and delivery efforts and adversely affect
our sales results, or even for a prolonged period of time, which could materially and adversely affect our business, financial condition,
and results of operations.
We
are also vulnerable to natural disasters and other calamities. We cannot assure you that we are adequately protected from the effects
of fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks, or similar
events. Any of the foregoing events may give rise to interruptions, damage to our property, delays in production, breakdowns, system
failures, technology platform failures, or internet failures, which could cause the loss or corruption of data or malfunctions of our
manufacturing facility as well as adversely affect our business, financial condition, and results of operations.
We
are heavily dependent on our top customers. If we fail to acquire new customers or retain existing customers in a cost-effective manner,
our business, financial condition and results of operations may be materially and adversely affected.
We
are heavily dependent on our top customers. We currently sell our products primarily through direct customers in Mainland China and to
some extent, the overseas customers in European countries and East Asia such as South Korea and Taiwan. For the nine-month period
ended September 30, 2023, two customers accounted for 26.7%, and 14.1% of the total accounts receivable balance,
respectively. For the year ended December 31, 2022, three customers accounted for 32.2%, 22.8%, and 14.0% of the total accounts receivable
balance, respectively. For the year ended December 31, 2021, six customers accounted for 25.7%, 18.6%, 12.5%, 11.5%, 11.3% and 10.2%
of the total accounts receivable balance, respectively.
Our
ability to cost-effectively attract new customers and retain existing customers, especially our top customers, is crucial to driving
net revenues growth and achieving profitability. We have invested significantly in branding, sales and marketing to acquire and retain
customers since our inception. For example, we attend domestic and international expos and exhibitions in marketing our products and
attracting new customers. We also expect to continue to invest significantly to acquire new customers and retain existing ones, especially
our top customers. There can be no assurance that new customers will stay with us, or the net revenues from new customers we acquire
will ultimately exceed the cost of acquiring those customers. In addition, if our existing customers, especially our existing top customers
no longer find our products appealing, or if our competitors offer more attractive products, prices, discounts or better customer services,
our existing customers may lose interest in us, decrease their orders or even stop ordering from us. If we are unable to retain our existing
customers, especially our top customers or to acquire new customers in a cost-effective manner, our revenues may decrease and our results
of operations will be adversely affected.
We
have a significant amount of accounts receivable, which could become uncollectible.
As
of September 30, 2023, we had approximately $13.9 million in net accounts receivable. Our accounts receivable primarily
includes balance due from customers when our products are sold and delivered to customers. Our customers are required to make full payment
within three to five months from delivery date, although our industry typical payment term is 180 days from delivery. As a result of
the COVID-19 outbreak in January 2020, collection activities from some of our customers affected by the pandemic resulted in longer payment
terms. We impliedly granted extended payment terms until December 31, 2020 to some of our customers. As of December 31, 2020, we collected
all overdue accounts receivable and resumed our typical payment term. Deteriorating conditions in, bankruptcies, or financial difficulties
of a customer or within their industries generally may impair the financial condition of our customers and hinder their ability to pay
us on a timely basis or at all, and accounts receivable are written off against allowances only after exhaustive collection efforts.
The failure or delay in payment by one or more of our customers could reduce our cash flows and adversely affect our liquidity and results
of operations.
Failure
to maintain the quality and safety of our products could have a material and adverse effect on our reputation, financial condition and
results of operations.
The
quality and safety of our products are critical to our success. We pay close attention to quality control, monitoring each step in the
process from procurement to production and from warehouse to delivery. Yet, maintaining consistent product quality depends significantly
on the effectiveness of our quality control system, which in turn depends on a number of factors, including but not limited to the design
of our quality control system, employee training to ensure that our employees adhere to and implement our quality control policies and
procedures and the effectiveness of monitoring any potential violation of our quality control policies and procedures. There can be no
assurance that our quality control system will always prove to be effective.
In
addition, the quality of the products or services provided by our suppliers or service providers is subject to factors beyond our control,
including the effectiveness and the efficiency of their quality control system, among others. There can be no assurance that our suppliers
or service providers may always be able to adopt appropriate quality control systems and meet our stringent quality control requirements
in respect of the products or services they provide. Any failure of our suppliers or service providers to provide satisfactory products
or services could harm our reputation and adversely impact our operations. In addition, we may be unable to receive sufficient compensation
from suppliers and service providers for the losses caused by them.
We
face intense competition in the touchscreen industry in general. If we fail to compete effectively, we may lose market share and customers,
and our business, financial condition and results of operations may be materially and adversely affected.
The
touchscreen industry is intensely competitive in general. We face few competition as we produce medium to large size capacitive touchscreens
which are specially tailored to certain industries, such as industrial HMI, gaming, financing, lottery, automotive, medical, and POS,
etc., and requires more stable supply, longer guaranty and life span, compared with small size touchscreens which is characteristic with
shorter life cycle and guaranty but more demand in quantity. However, we still have some competitors competing in Mainland China
and globally with us. Our competitors may have more financial, technical, geographical advantage, marketing and other resources than
we do and may be more experienced and able to devote greater resources to the development, promotion and support of their business. Some
competitors are well-established in Mainland China and globally and any defensive measures they take in response to our expansion
could hinder our growth and adversely affect our sales and results of operations.
Furthermore,
increased competition may reduce our market share and profitability and require us to increase our sales and marketing efforts and capital
commitment in the future, which could negatively affect our results of operations or force us to incur further losses. Although we have
accumulated some and continuously growing our customer base, there is no assurance that we will be able to continue to do so in the future
against current or future competitors, and such competitive pressures may have a material adverse effect on our business, financial condition
and results of operations.
If
we do not obtain substantial additional financing, our ability to execute on our business plan as outlined in this prospectus will be
impaired.
Due
to the withdrawal of the land use right to the Property and cancellation of our ownership certificates pertaining to the buildings on
the Property by the local government pursuant to the Guidelines and the Compensation Agreement, we are actively searching for an appropriate
parcel in Chengdu Medicine City (Technology Park), Wenjiang District, Chengdu for the construction of our Mainland China subsidiary’s
new production facilities and office buildings. As of the date of this prospectus, our management estimates that our capital needs for
this acquisition and construction will be approximately RMB170.0 million ($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, our plans call for significant new investments in research and development, marketing, expanded productions capacity, and working
capital for raw materials and other items. Should our capital needs be higher than our estimation, we will be required to seek additional
investments, loans or debt financing to fully pursue our business plans. Such additional investment may not be available to us on terms
which are favorable or acceptable. Should we be unable to meet our full capital needs, our ability to fully implement our business plan
will be impaired.
Failure
to secure a new piece of parcel for the construction of our new buildings and facilities, and failure to acquire and install new production
lines on the new parcel, our business, financial condition and results of operations may be materially and adversely affected.
As
of the date of this prospectus, our use right to the Property was withdrawn by the local government and all ownership certificates pertaining
to the buildings on the Property were returned to the local government for cancellation.
In
order to minimize the interruption of our business, Sichuan Vtouch 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), which period has been extended to October 31, 2022.
On October 16, 2022, Sichuan Vtouch entered an extension to the Leaseback Agreement with Sichuan Renshou to extend the period it granted
Sichuan Vtouch to lease back the Properties until October 31, 2023, then subsequently extended to October 31, 2024, at a monthly
rent of RMB400,000 (approximately $59,941).
As
of the date of this prospectus, 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. We estimate the acquisition of the new
parcel and new production lines and construction of the new facilities and office buildings on the new parcel will be completed prior
to October 31, 2024, but there is no assurance and we may need extended time to achieve our business plan. If we fail to secure
such acquisition and construction prior to October 31, 2024 and the extended period, if any, our business, financial condition
and results of operations may be materially and adversely affected.
Any
adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net
income and the value of your investment.
The
tax regime in Mainland China is rapidly evolving and there is significant uncertainty for taxpayers in Mainland China as
PRC tax laws may be interpreted in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries owe and/or
are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws, rules and regulations,
arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities
determine that any contractual arrangements were not entered into on an arm’s length basis and therefore constitute a favorable
transfer pricing, the PRC tax liabilities of the relevant subsidiaries could be increased, which could increase our overall tax liabilities.
In addition, the PRC tax authorities may impose late payment interest. Our net income may be materially reduced if our tax liabilities
increase.
If
our preferential tax treatments and government subsidies are revoked or become unavailable or if the calculation of our tax liability
is successfully challenged by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions.
The
Chinese government has provided tax incentives to our former subsidiary in Mainland China, Sichuan Wetouch, including reduced
enterprise income tax rates. For example, under the PRC Enterprise Income Tax Law and its implementation rules, the statutory
enterprise income tax rate is 25%. However, the income tax of an enterprise that has been determined to be a qualified enterprise located
in western region of Mainland China can be reduced to a preferential rate of 15%. The qualification of preferential tax rate is
effective for a renewable three-year permitted. As we have dissolved Sichuan Wetouch, and its business and operations have been assumed
by our Mainland China subsidiary Sichuan Vtouch, Sichuan Vtouch has reapplied for the preferential rate of 15% as a qualified
enterprise. Such application is currently pending with the PRC tax authorities. If our Mainland China subsidiary’s application
for the qualification of preferential tax rate benefit is not approved, our PRC subsidiary will be subject to the statutory enterprise
income tax rate of 25%. Further, in the ordinary course of our business, we are subject to complex income tax and other tax regulations,
and significant judgment is required in the determination of a provision for income taxes. Although we believe our tax provisions are
reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest, and penalties in
excess of our tax provisions, our financial condition and results of operations would be materially and adversely affected.
A
significant interruption in the operations of our third-party suppliers could potentially disrupt our operations.
We
have limited control over the operations of our third-party suppliers and other business partners and any significant interruption in
their operations may have an adverse impact on our operations. For example, a significant interruption in the operations of our supplier’s
manufacturing facilities could cause delay or termination of shipment of the raw materials to our Mainland China subsidiary, which
may cause delay or termination of shipment of our products to our customers, thus resulting in penalties or fines due to our breach of
contract. If we could not solve the impact of the interruptions of operations of our third-party suppliers, our business operations and
financial results may be materially and adversely affected.
We
face the risk of fluctuations in the cost, availability and quality of our raw materials, which could adversely affect our results of
operations.
The
cost, availability and quality of the raw materials, such as indium tin oxide glasses, panels, are important to our operations. If the
cost of raw materials increases due to large market price fluctuation or due to any other reason, our business and results of operations
could be adversely affected. Lack of availability of these raw materials, whether due to shortages in supply, delays or interruptions
in processing, failure of timely delivery or otherwise, could interrupt our operations and adversely affect our financial results.
We
are dependent upon key executives and highly qualified managers and we cannot assure their retention.
Our
success depends, in part, upon the continued services of key members of our management. Our executives’ and managers’ knowledge
of the market, our business and our Company represents a key strength of our business, which cannot be easily replicated. The success
of our business strategy and our future growth also depend on our ability to attract, train, retain and motivate skilled managerial,
sales, administration, development and operating personnel.
There
can be no assurance that our existing personnel will be adequate or qualified to carry out our strategy, or that we will be able to hire
or retain experienced, qualified employees to carry out our strategy. The loss of one or more of our key management or operating personnel,
or the failure to attract and retain additional key personnel, could have a material adverse effect on our business, financial condition
and results of operations.
We
do not have long-term contracts with our suppliers and they can reduce order quantities or terminate their sales to us at any time.
Our
Mainland China subsidiary does not have long term contracts with our suppliers. At any time, our suppliers can reduce the quantities
of products they sell to our Mainland China subsidiary, or cease selling products to our Mainland China subsidiary altogether.
Such reductions or terminations could have a material adverse impact on our revenues, profits and financial condition.
If
we fail to adopt new technologies to evolving customer needs or emerging industry standards, our business may be materially and adversely
affected.
To
remain competitive, we must continue to stay abreast of the constantly evolving industry trends and to enhance and improve our technology
accordingly. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in
our business. There can be no assurance that we will be able to use new technologies effectively or meet customer’s requirements.
If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer preferences, whether
for technical, legal, financial or other reasons, our business may be materially and adversely affected.
We
may experience significant liability claims or complaints from customers, or adverse publicity involving our products and our services.
We
face an inherent risk of liability claims or complaints from our customers. We take our customers’ complaints seriously and endeavor
to reduce such complaints by implementing various remedial measures. Nevertheless, we cannot assure you that we can successfully prevent
or address all customer complaints.
Any
complaints or claims against us, even if meritless and unsuccessful, may divert management attention and other resources from our business
and adversely affect our business and operations. Customers may lose confidence in us and our brand, which may adversely affect our business
and results of operations. Furthermore, negative publicity including but not limited to negative online reviews on social media and crowd-sourced
review platforms, industry findings or media reports related to safety and quality of our products, whether or not accurate, and whether
or not concerning our products, can adversely affect our business, results of operations and reputation.
PRC
regulations relating to the establishment of offshore special purpose companies by Mainland China residents may subject our Mainland
China resident beneficial owners or our Mainland China subsidiary to liability or penalties, limit our ability to inject capital
into our Mainland China subsidiary, limit our Mainland China subsidiary’ ability to increase their registered capital
or distribute profits to us, or may otherwise adversely affect us.
In
July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore
Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant
Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special
Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires
Mainland China residents (including Mainland China individuals and Mainland China corporate entities) to register
with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable
to our shareholders who are Mainland China residents and may be applicable to any offshore acquisitions that we make in the future.
Under
SAFE Circular 37, Mainland China residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect
investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches.
In addition, any Mainland China resident who is a direct or indirect shareholder of an SPV is required to update its filed registration
with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in Mainland
China is required to urge the Mainland China resident shareholders to update their registration with the local branch of SAFE.
If any Mainland China shareholder of such SPV fails to make the required registration or to update the previously filed registration,
the subsidiary of such SPV in Mainland China may be prohibited from distributing its profits or the proceeds from any capital
reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions
into its subsidiary in Mainland China. On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving
Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice
13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including
those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine
the applications and accept registrations under the supervision of SAFE.
Some
of our shareholders that we are aware of are subject to SAFE regulations, and we expect all of these shareholders will have completed
all necessary registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. We cannot assure you, however,
that all of these shareholders may continue to make required filings or updates in a timely manner, or at all. We can provide no assurance
that we are or will in the future continue to be informed of identities of all Mainland China residents holding direct or indirect
interest in our company. Any failure or inability by such shareholders to comply with SAFE regulations may subject us to fines or legal
sanctions, such as restrictions on our cross-border investment activities or our Mainland China subsidiaries’ ability to
distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying
dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.
Furthermore,
as these foreign exchange regulations are still relatively new and their interpretation and implementation have been constantly evolving,
it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted,
amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval
process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings,
which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a Mainland China
domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability
to implement our acquisition strategy and could adversely affect our business and prospects.
As
of the date of this prospectus, the Mainland China residents have either not completed, or have not applied for, foreign exchange
registration under the SAFE Circular 37 and other related rules. Although they are either in the process of making foreign exchange registration
or plan to make foreign exchange registrations, they may still face with the above said possible fines in accordance with the PRC Laws.
We
have no business liability or disruption insurance, which could expose us to significant costs and business disruption.
The
insurance industry in Mainland China is still at an early stage of development, and insurance companies in Mainland China
currently offer limited business-related insurance products. We do not have any business liability or disruption insurance to cover our
operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance
on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured risks may result in substantial costs
and the diversion of resources, which could adversely affect our results of operations and financial condition.
We
may incur liabilities that are not covered by insurance.
While
we seek to maintain appropriate levels of insurance, not all claims are insurable and we may experience major incidents of a nature that
are not covered by insurance. We do not have other insurances that cover, among other things, employee-related accidents and injuries,
product or business liability and other property damage and liability deriving from our activities. Furthermore, insurance companies
in Mainland China currently do not offer as extensive an array of insurance products as insurance companies in more developed
economies. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance
on commercially reasonable terms make it impractical for us to have such insurance. We maintain an amount of insurance protection that
we believe is adequate, but there can be no assurance that such insurance will continue to be available on acceptable terms or that our
insurance coverage will be sufficient or effective under all circumstances and against all liabilities to which we may be subject. If
we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business
interruption, our results of operations could be materially and adversely affected. We could, for example, be subject to substantial
claims for damages upon the occurrence of several events within one calendar year. In addition, our insurance costs may increase over
time in response to any negative development in our claims history or due to material price increases in the insurance market in general.
Risks
Related to Doing Business in China
Adverse
regulatory developments in Mainland China may subject us to additional regulatory review and expose us to government restrictions,
and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory
developments in Mainland China may impose additional compliance requirements for companies with significant Mainland China-based
operations, all of which could increase our compliance costs, subject us to additional disclosure requirements, and/or suspend or
terminate our future securities offerings, making capital-raising more difficult.
As
substantially all of our operations are based in Mainland China, we are subject to a wide range of relevant PRC laws. The recent
regulatory developments in Mainland China, in particular with respect to restrictions on Mainland China-based companies
raising capital offshore and the government-led cybersecurity reviews of certain companies, may lead to additional regulatory review
in Mainland China over our financing and capital raising activities in the United States. In addition, we may become subject to
industry-wide regulations that may be adopted by the relevant Mainland China authorities, which may have the effect of limiting
our product and service offerings, restricting the scope of our operations in Mainland China, or causing the suspension or termination
of our business operations in Mainland China entirely, all of which will materially and adversely affect our business, financial
condition and results of operations. We may have to adjust, modify, or completely change our business operations in response to adverse
regulatory changes or policy developments, and we cannot assure you that any remedial action adopted by us can be completed in a timely,
cost-efficient, or liability-free manner or at all.
On
July 6, 2021, the relevant PRC government authorities published the Opinions on Strictly Cracking Down Illegal Securities Activities
in Accordance with the Law. These opinions call for strengthened regulation over illegal securities activities and supervision on overseas
listings by Mainland China-based companies and propose to take effective measures, such as promoting the construction of relevant
regulatory systems to deal with the risks and incidents faced by Mainland China-based overseas-listed companies. On December 24,
2021, the CSRC released the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities
by Domestic Enterprises (Draft for Comments) (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance
of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”, together
with the Draft Administrative Provisions, the “Draft Rules”). The Draft Rules lay out the filing regulations for both direct
and indirect overseas listings and clarify the determination criteria for indirect overseas listings in overseas markets. Among other
requirements, if a domestic enterprise intends to indirectly offer and list securities in an overseas market, the record-filing obligation
shall be completed within three working days after the overseas listing application is submitted. On February 17, 2023, the CSRC promulgated
the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Administrative
Measures”), which took effect on March 31, 2023. The Trial Administrative Measures further stipulate the rules and requirements
for overseas offering and listing conducted by Mainland China domestic companies. Our PRC counsel has advised that because
our common stock currently trades in the U.S., we are not required to submit filings to the CSRC before this offering is completed and
this offering is not conditioned on CSRC approval. Rather, within three days of the closing of this offering, we must submit filings
to the CSRC in accordance with the Trial Administrative Measures. However, given that the Trial Administrative Measures were recently
promulgated, there remain substantial uncertainties as to their interpretation, application, and enforcement and there is no guarantee
that the relevant PRC government agencies, including the CSRC, would reach the same conclusion that we and our PRC counsel have reached.
In addition, if we were to fail to comply with the post-offering filing obligations imposed by the Trial Administrative Measures or make
a misrepresentation, misleading statement or material omission in the materials we submit to the CSRC, the CSRC would have the right
to order rectification, issue a warning and impose a fine on us of between RMB 1 million and RMB 10 million and issuing
a warning to the parties responsible for such failure, misrepresentation or material omission and impose a fine on each of such individuals
ranging from RMB 500,000 to RMB 5 million.
On July 10, 2021, the Cyberspace
Administration of China issued the Measures for Cybersecurity Review (Revision Draft for Comments), or the Measures, for public comments,
which propose to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or
may affect national security, including listings in foreign countries by companies that possess the personal data of more than one million
users. On December 28, 2021, the Measures for Cybersecurity Review (2021 version) were promulgated and became effective on February
15, 2022 (the “Measures”), which iterates that any “online platform operators” controlling personal information
of more than one million users that seeks to list on a foreign stock exchange shall also be subject to cybersecurity review. As we are
neither an “operator of critical information infrastructure” nor a “data processor” carrying out data processing
activities that affect or may affect national security, we believe that the Measures are not applicable to us even after they take effect
in current form. The PRC government is increasingly focused on data security, recently launching cybersecurity review against a number
of mobile apps operated by several US-listed Chinese companies and prohibiting these apps from registering new users during the review
period. There are great uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations regarding data
and privacy security. We may be required to change our data and other business practices and be subject to regulatory investigations,
penalties, and increased cost of operations as a result of these laws and policies.
On
July 30, 2021, in response to the recent regulatory developments in China and actions adopted by the PRC government, the Chairman of
the SEC issued a statement asking the SEC staff to seek additional disclosures from offshore issuers associated with China-based operating
companies before their registration statements will be declared effective, including whether the China-based operating company and the
issuer, when applicable, received or were denied permission from Chinese authorities to list on U.S. exchanges and the risks that such
approval could be denied or rescinded. On August 1, 2021, the China Securities Regulatory Commission stated in a statement that it had
taken note of the new disclosure requirements announced by the SEC regarding the listings of Chinese companies and the recent regulatory
development in China, and that both countries should strengthen communications on regulating China-related issuers. We are subject to
a variety of PRC laws and may be subject to tightened regulatory review and exposed to government restrictions in Mainland China.
In light of the recent regulatory and policy developments in Mainland China and government actions taken by the PRC government,
including possible imposition of restrictions and/or approval requirements on Mainland China-based companies raising capital offshore,
the offering of our securities may be subject to additional disclosure requirements and review that the SEC or other regulatory authorities
in the United States may adopt for companies with Mainland China-based operations.
Upon
the effectiveness of the Trial Administrative Measures, we could be subject to the Trial Administrative Measures, as the Company has:
(i) 50% or more of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated
financial statements for the most recent accounting year is accounted for by Mainland China domestic companies; and (ii) the main
parts of the issuer’s business activities are conducted in Mainland China, or its main places of business are located in
Mainland China, or the senior managers in charge of its business operation and management are mostly Chinese citizens or domiciled
in Mainland China; and, if required, we cannot assure you that we will be able to complete such process on time or at all.
On
February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies
(the “Trial Administrative Measures”), which took effect on March 31, 2023. Compared to the Draft Rules, the Trial
Administrative Measures further clarified and emphasized several aspects, including: (i) comprehensive determination of the “indirect
overseas offering and listing by Mainland China domestic companies” in compliance with the principle of “substance
over form” and particularly, an issuer will be required to go through the filing procedures under the Trial Administrative Measures
if the following criteria are met at the same time: a) 50% or more of the issuer’s operating revenue, total profit, total assets
or net assets as documented in its audited consolidated financial statements for the most recent accounting year is accounted for by
Mainland China domestic companies, and b) the main parts of the issuer’s business activities are conducted in Mainland
China, or its main places of business are located in Mainland China, or the senior managers in charge of its business operation
and management are mostly Chinese citizens or domiciled in Mainland China; (ii) exemptions from immediate filing requirements
for issuers that a) have already been listed or registered but not yet listed in foreign securities markets, including U.S. markets,
prior to the effective date of the Trial Administrative Measures, and b) are not required to re-perform the regulatory procedures with
the relevant overseas regulatory authority or the overseas stock exchange, c) whose such overseas securities offering or listing shall
be completed before September 30, 2023. However, such issuers shall carry out filing procedures as required if they conduct refinancing
or are involved in other circumstances that require filing with the CSRC; (iii) a negative list of types of issuers banned from listing
overseas, such as issuers under investigation for bribery and corruption; (iv) regulation of issuers in specific industries; (v) issuers’
compliance with national security measures and the personal data protection laws; and (vi) certain other matters such as: an issuer must
file with the CSRC within three business days after it submits an application for initial public offering to competent overseas regulators;
and subsequent reports shall be filed with the CSRC on material events, including change of control or voluntary or forced delisting
of the issuer(s) who have completed overseas offerings and listings. Our PRC counsel has advised that because our common stock currently
trades in the U.S., we are not required to submit filings to the CSRC before this offering is completed and this offering is not conditioned
on CSRC approval. Rather, within three days of the closing of this offering, we must submit filings to the CSRC in accordance with the
Trial Administrative Measures. However, given that the Trial Administrative Measures were recently promulgated, there remain substantial
uncertainties as to their interpretation, application, and enforcement and there is no guarantee that the relevant PRC government agencies,
including the CSRC, would reach the same conclusion that we and our PRC counsel have reached. In addition, if we were to fail to comply
with the post-offering filing obligations imposed by the Trial Administrative Measures or make a misrepresentation, misleading statement
or material omission in the materials we submit to the CSRC, the CSRC would have the right to order rectification, issue a warning
and impose a fine on us of between RMB 1 million and RMB 10 million and issuing a warning to the parties responsible for
such failure, misrepresentation or material omission and impose a fine on each of such individuals ranging from RMB 500,000 to RMB 5
million.
Our common stock
will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, if it is later
determined that the PCAOB is unable to inspect and investigate completely our auditor. The delisting of and prohibition from trading
our common stock, or the threat of their being delisted and prohibited from trading, may cause the value of our common stock to significantly
decline or be worthless.
Pursuant
to the HFCAA, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been
subject to inspections by the PCAOB for two consecutive years, the SEC will prohibit our shares from being traded on a national securities
exchange or in the over-the-counter trading market in the United States.
On
December 18, 2020, the HFCAA was signed into law. The HFCAA has since then been subject to amendments by the U.S. Congress and interpretations
and rulemaking by the SEC. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”),
which proposes to reduce the period of time for foreign companies to comply with PCAOB audits from three to two consecutive years, thus
reducing the time period before the securities of such foreign companies may be prohibited from trading or delisted. On December 29,
2022, the Consolidated Appropriations Act, 2023 was signed into law, which contained, among other things, an identical provision to the
AHFCAA, and reduced the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three
years to two.
On
December 16, 2021, the PCAOB issued a report to notify the SEC of its determination relating to the PCAOB’s inability to inspect
or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The inability of the PCAOB
to conduct inspections of auditors in China made it more difficult to evaluate the effectiveness of these accounting firms’ audit
procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could
cause existing and potential investors in issuers operating in China to lose confidence in such issuers’ procedures and reported
financial information and the quality of financial statements.
On
December 15, 2022, the PCAOB released a statement confirming it has secured complete access to inspect and investigate registered public
accounting firms headquartered in mainland China and Hong Kong, and it issued the 2022 HFCAA Determination Report to vacate its precious
determinations to the contrary. The PCAOB is continuing to demand complete access, and it will act immediately to reconsider such determinations
should China obstruct, or otherwise fail to facilitate the PCAOB’s access, at any time.
Our
auditor, the independent registered public accounting firm that issues the audit report, as an auditor of companies that are traded publicly
in the United States and a firm registered with the PCAOB, is subject to laws in the United States, pursuant to which the PCAOB conducts
regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in Lakewood, Colorado
and has been inspected by the PCAOB on a regular basis.
Further
developments related to the HFCAA could add uncertainties to our offering. We cannot assure you what further actions the SEC, the PCAOB
or the stock exchanges will take to address these issues and what impact such actions will have on companies that have significant operations
in the PRC and have securities listed on a U.S. stock exchange (including a national securities exchange or over-the-counter stock market).
In addition, any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit
information could create uncertainty for investors, the market price of our common stock could be adversely affected, and we could be
delisted if we and our auditor are unable to meet the PCAOB inspection requirement. Such a delisting would substantially impair your
ability to sell or purchase our common stock when you wish to do so, and would have a negative impact on the price of our shares.
PRC
regulation of loans to and direct investment in Mainland China entities by offshore holding companies and governmental control
of currency conversion may delay or prevent us from using the proceeds of this Underwritten Offering to make loans or additional capital
contributions to our Chinese subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand
our business.
We
are an offshore holding company conducting our operations in Mainland China. We may make loans to our Mainland China subsidiaries
to the approval, registration, and filing with governmental authorities and limitation of amount, or we may make additional capital contributions
to our wholly foreign-owned subsidiaries in Mainland China. Any loans to our wholly foreign-owned subsidiaries in Mainland
China, which are treated as foreign-invested enterprises under PRC law, are subject to foreign exchange loan registrations. In addition,
a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope.
The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment
beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly
used for investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant
laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business
license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested
real estate enterprises).
In
light of the various requirements imposed by PRC regulations on loans to and direct investment in Mainland China entities by offshore
holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary
government approvals or filings on a timely basis, if at all, with respect to future loans by us to our Hong Kong or Mainland China
subsidiaries or with respect to future capital contributions by us to our Hong Kong or Mainland China subsidiaries. If we
fail to complete such registrations or obtain such approvals, our ability to use the proceeds from this Underwritten Offering and to
capitalize or otherwise fund our Chinese operations may be negatively affected, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
Labor
laws in the Mainland China may adversely affect our results of operations.
The
PRC National People’s Congress promulgated the Labor Contract Law which became effective on January 1, 2008 and was amended on
December 28, 2012, and the State Council promulgated implementing regulations for the labor contract law on September 18, 2008. The labor
contract law and the implementing regulations impose requirements concerning, among others, the execution of written contracts between
employers and employees, the time limits for probationary periods, and the length of employment contracts. The interpretation and implementation
of these regulations are still evolving, our employment practices may violate the labor contract law and related regulations and we could
be subject to penalties, fines or legal fees as a result. If we are subject to severe penalties or incur significant legal fees in connection
with labor law disputes or investigations, our business, financial condition and results of operations may be adversely affected.
Further,
the law requires certain terminations be based upon seniority and not merit. In the event that we decide to significantly change or decrease
our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous
to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results
of operations.
Non-compliance
with labor-related laws and regulations of the Mainland China may have an adverse impact on our financial condition and results
of operation.
We
have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various
statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance
and childbearing insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law,
or the Labor Contract Law, that became effective in January 2008 and its implementing regulations that became effective in September
2008 and was amended in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages,
paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that
we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation
regulations may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business
and results of operations. We believe our current practice complies with the Labor Contract Law and its amendments. However, the relevant
governmental authorities may take a different view and impose fines on us.
As
the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment
practice does not and will not violate labor-related laws and regulations in Mainland China, which may subject us to labor disputes
or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide
additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely
affected.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
We
are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”) and other laws that prohibit improper payments or offers of
payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the
purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment
of bribes to government officials. We have operations, agreements with third parties, and make sales in Mainland China, which
may experience corruption. Our activities in Mainland China may create the risk of unauthorized payments or offers of payments
by one or more of the employees of our company, because such employees might act against our policies, outside of our control. Violations
of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Our
business may be materially and adversely affected if our Mainland China subsidiary declares bankruptcy or becomes subject to a
dissolution or liquidation proceeding.
The
Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise
will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or
are demonstrably, insufficient to clear such debts.
Our
Mainland China subsidiary holds certain assets that are important to our business operations. If our Mainland China subsidiary
undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these
assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition
and results of operations.
According
to the SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration
Policies for Direct Investment, effective on December 17, 2012, and the Provisions for Administration of Foreign Exchange Relating to
Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if our Mainland China subsidiary undergoes a voluntary
or involuntary liquidation proceeding, prior approval from the SAFE for remittance of foreign exchange to our shareholders abroad is
no longer required, but we still need to conduct a registration process with the SAFE local branch. It is not clear whether “registration”
is a mere formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.
Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and operations. The PRC government has recently indicated an intent to exert more oversight and control over overseas securities offerings
and other capital markets activities and foreign investment in Mainland China-based companies like us. Any such action, once taken
by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors
and cause the value of such securities to significantly decline or in extreme cases, become worthless.
Substantially
all of our assets and operations are located in Mainland China. Accordingly, our business, financial condition, results of operations
and prospects may be influenced to a significant degree by political, economic and social conditions in Mainland China generally.
The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and
the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in Mainland
China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry
development by imposing industrial policies.
The PRC government has significant
authority to exert influence on the ability of a Mainland China-based company, such as us, to conduct its business, accept foreign
investments or list on an U.S. or other foreign exchanges. For example, we face risks associated with regulatory approvals of offshore
offerings, anti-monopoly regulatory actions, as well as oversight on cybersecurity and data privacy. Such risks or any actions by the
PRC government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in Mainland
China-based issuers could result in a material change in our operations and/or the value of our common stock or could significantly
limit or completely hinder our ability to offer or continue to offer our common stock and/or other securities to investors and cause
the value of such securities to significantly decline or be worthless. The PRC government has significant authority, oversight and discretion
over the conduct of our business and may intervene with or influence our operations as the government deems appropriate to further regulatory,
political and societal goals. The PRC government has recently published new policies that significantly affected certain industries such
as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies
regarding our industry that could adversely affect our business, financial condition and results of operations. Furthermore, the PRC
government has recently indicated an intent to exert more oversight and control over overseas securities offerings and other capital
markets activities and foreign investment in Mainland China-based companies like us. Any such action, once taken by the PRC government,
could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value
of such securities to significantly decline or in extreme cases, become worthless.
The
Chinese government also exercises significant control over Mainland China’s economic growth through allocating resources,
controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular
industries or companies.
While
the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various
sectors of the economy. Any adverse changes in economic conditions in Mainland China, in the policies of the Chinese government
or in the laws and regulations in Mainland China could have a material adverse effect on the overall economic growth of Mainland
China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services
and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on
us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments
or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate
adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely
affect our business and operating results.
Uncertainties with respect to the PRC legal
system, including uncertainties regarding the enforcement of laws and sudden and unexpected changes in laws and regulations in Mainland
China, could adversely affect us and limit the legal protections available to you and us.
Our
operations in Mainland China are governed by PRC laws and regulations. Our wholly foreign-owned Mainland China operating
subsidiary Sichuan Vtouch is subject to laws and regulations applicable to foreign investment in Mainland China. The Mainland
China legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the
civil law system may be cited for reference but have limited precedential value. In addition, any new or changes in PRC laws and regulations
related to foreign investment in Mainland China could affect the business environment and our ability to operate our business
in Mainland China.
Since
the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations and rules are not always uniform and
enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. Uncertainties
due to evolving laws and regulations could also impede the ability of a Mainland China-based company, such as our company, to
obtain or maintain permits or licenses required to conduct business in Mainland China. In the absence of required permits or licenses,
governmental authorities could impose material sanctions or penalties on us. In addition, some regulatory requirements issued by certain
PRC government authorities may not be consistently applied by other PRC government authorities (including local government authorities),
thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court
proceedings in Mainland China may be protracted, resulting in substantial costs and diversion of resources and management attention.
Since Mainland China administrative and court authorities have significant discretion in interpreting and implementing statutory
provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level
of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts
we have entered into and could materially and adversely affect our business and results of operations.
The PRC legal system is
based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive
effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Such
unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to
continue our operations.
Furthermore,
if Mainland China adopts more stringent standards with respect to environmental protection or corporate social responsibilities,
we may incur increased compliance costs or become subject to additional restrictions in our operations. Intellectual property rights
and confidentiality protections in Mainland China may also not be as effective as in the United States or other countries. In
addition, we cannot predict the effects of future developments in the PRC legal system on our business operations, including the promulgation
of new laws, or changes to existing laws or the interpretation or enforcement thereof. These uncertainties could limit the legal protections
available to us and our investors, including you. Moreover, any litigation in China may be protracted and result in substantial costs
and diversion of our resources and management attention.
You
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us
or our management based on foreign laws.
We
are a company incorporated under the laws of the United States and we conduct substantially all of our operations in Mainland China.
In addition, our officers and directors reside within Mainland China and are PRC nationals. As a result, it may be difficult
for you to effect service of process upon us or those persons inside Mainland China. It may also be difficult for you to enforce
in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against
us and our officers and directors as none of them currently resides in the United States or has substantial assets located in the United
States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts against
us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.
The
recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Mainland China courts may
recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties
between Mainland China and the country where the judgment is made or on principles of reciprocity between jurisdictions. Mainland
China does not have any treaties or other forms of written arrangement with the United States that provide for the reciprocal recognition
and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the Mainland China courts will not
enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of
PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a Mainland China
court would enforce a judgment rendered by a court in the United States.
Fluctuations
in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political
and economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over
the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the
U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly
and unpredictably. On November 30, 2015, the Executive Board of IMF completed the regular five-year review of the basket of currencies
that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a
freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese
yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S.
dollar and persistent capital outflows of Mainland China. This depreciation halted in 2017, and the RMB appreciated approximately
7% against the U.S. dollar during this one-year period. With the development of the foreign exchange market and progress towards interest
rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange
rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar
in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the
Renminbi and the U.S. dollar in the future.
Significant
revaluation of the Renminbi may have a material and adverse effect on our operations. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the
Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose
of making payments for dividends on our shares of Common Stock or for other business purposes, appreciation of the U.S. dollar against
the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Very
limited hedging options are available in Mainland China to reduce our exposure to exchange rate fluctuations. To date, we have
not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide
to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be
able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign currency.
Governmental
control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of
currency out of Mainland China. We receive substantially all of our revenues in Renminbi. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign
exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements.
Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our Mainland
China subsidiary in Mainland China may be used to pay dividends to our company. However, approval from or registration with
appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of Mainland
China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE
approval to use cash generated from the operations of our Mainland China subsidiary to pay off their respective debt in a currency
other than Renminbi owed to entities outside Mainland China, or to make other capital expenditure payments outside Mainland
China in a currency other than Renminbi.
In
light of the flood of capital outflows of Mainland China, the PRC government may from time to time impose more restrictive foreign
exchange policies and step up scrutiny of major outbound capital movement. More restrictions and substantial vetting process may be required
by SAFE or other government authorities to regulate cross-border transactions falling under the capital account. The PRC government may
at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control
system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends
in foreign currencies to our shareholders, including holders of our Common Stock.
Certain
political and economic considerations relating to the PRC could adversely affect our Company.
While the PRC government has
pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the Mainland China’s economy
is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on
foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government
exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the PRC government
are unprecedented or experimental, and are expected to be refined and improved. Any readjustment process may not necessarily have a positive
effect on our operations or future business development. Our operating results may be adversely affected by changes in the PRC’s
economic and social conditions as well as by changes in the policies of the PRC government, such as changes in laws and regulations (or
the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of
taxation, and the imposition of restrictions on currency conversion.
The
Chinese government exerts substantial influence over the manner in which we must conduct our business activities and may intervene
or influence our operations at any time, which could result in a material change in our operations and/or the value of our common stock.
The
Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in Mainland China may be harmed by changes in its laws and regulations,
including those relating to taxation, environmental regulations, land use rights, property and other matters. The central or respective
local governments may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures
and efforts on our part to ensure our compliance with such regulations or interpretations. The Chinese government may intervene or influence
our operations at any time, which could result in a material change in our operations and/or the value of our common stock.
Failure
to comply with the Administrative Measures on Individual Foreign Exchange relating to the overseas direct investment or the engagement
in the issuance or trading of securities overseas by our Mainland China resident stockholders may subject such stockholders to
fines or other liabilities.
Other
than Notice 37, our ability to conduct foreign exchange activities in the Mainland China may be subject to the interpretation
and enforcement of the Implementation Regulations of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE
in January 2007 (as amended and supplemented, the “Administrative Measures on Individual Foreign Exchange”). Under the Administrative
Measures on Individual Foreign Exchange, any Mainland China individual seeking to make a direct investment overseas or engage
in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with
SAFE provisions. Mainland China individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.
We
may not be fully informed of the identities of all our beneficial owners who are Mainland China residents. For example, because
the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers
in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are Mainland China residents.
Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such Mainland China residents
will be able to complete the necessary approval and registration procedures required by the Administrative Measures on Individual Foreign
Exchange.
It
is uncertain how the Administrative Measures on Individual Foreign Exchange will be interpreted or enforced and whether such interpretation
or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether
the failure by any of our Mainland China resident stockholders to make the required registration will subject our Mainland
China subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of securities
offering into Mainland China, restriction on remittance of dividends or other punitive actions that would have a material adverse
effect on our business, results of operations and financial condition.
If
we are unable to obtain business insurance in Mainland China, we may not be protected from risks that are customarily covered
by insurance in the United States.
Business
insurance is not readily available in Mainland China. To the extent that we suffer a loss of a type that would normally be covered
by insurance in the United States, such as product liability and general liability insurance, we would incur significant expenses in
both defending any action and in paying any claims that result from a settlement or judgment. We have not obtained fire, casualty and
theft insurance, and there is no insurance coverage for our raw materials, goods and merchandise, furniture or buildings in Mainland
China. Any losses incurred by us will have to be borne by us without any assistance, and we may not have sufficient capital to cover
material damage to, or the loss of, our production facility due to fire, severe weather, flood or other causes, and such damage or loss
may have a material adverse effect on our financial condition, business and prospects.
If
we are classified as a Mainland China resident enterprise for Mainland China enterprise income tax purposes, such classification
could result in unfavorable tax consequences to us and our non-Mainland China shareholders and the common stockholders.
Under
the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of Mainland China with its
“de facto management body” within Mainland China is considered a “resident enterprise” and
will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term
“de facto management body” as the body that exercises full and substantial control and overall management over
the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or
SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de
facto management body” of a Mainland China-controlled enterprise that is incorporated offshore is located in Mainland
China. Although this circular applies only to offshore enterprises controlled by Mainland China enterprises or Mainland
China enterprise groups, not those controlled by Mainland China individuals or foreigners, the criteria set forth in the
circular may reflect the SAT’s general position on how the “de facto management body” text should be
applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated
enterprise controlled by a Mainland China enterprise or a Mainland China enterprise group will be regarded as a Mainland
China tax resident by virtue of having its “de facto management body” in Mainland China, and will be
subject to Mainland China enterprise income tax on its global income only if all of the following conditions are met: (i) the
primary location of the day-to-day operational management is in Mainland China; (ii) decisions relating to the
enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in Mainland
China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder
resolutions are located or maintained in Mainland China; and (iv) at least 50% of voting board members or senior executives
habitually reside in Mainland China.
We
believe our Company, excluding our Mainland China subsidiary, is not a Mainland China resident enterprise for Mainland
China tax purposes. However, the tax resident status of an enterprise is subject to determination by the Mainland China tax
authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the Mainland
China tax authorities determine that our company is a Mainland China resident enterprise for enterprise income tax purposes,
we would be subject to Mainland China enterprise income on our worldwide income at the rate of 25%. Furthermore, we would be required
to withhold a 10% tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident enterprise
shareholders (including the common stockholders) may be subject to Mainland China tax on gains realized on the sale or other disposition
of the common stock, if such income is treated as sourced from within Mainland China. Furthermore, if we are deemed a Mainland
China resident enterprise, dividends paid to our non-Mainland China individual shareholders (including the common stock holders)
and any gain realized on the transfer of the common stock or ordinary shares by such shareholders may be subject to Mainland China
tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable
tax treaty, but it is unclear whether non-Mainland China shareholders of our company would be able to claim the benefits of any
tax treaties between their country of tax residence and Mainland China in the event that we are treated as a Mainland China
resident enterprise. Any such tax may reduce the returns on your investment in our common stock.
The
PRC government may issue further restrictive measures in the future.
We
cannot assure you that the PRC government will not issue further restrictive measures in the future. The PRC government’s
restrictive regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our access
to capital resources or even restrict our business operations, which could further adversely affect our business and prospects.
Interpretation
of PRC laws and regulations involve uncertainty.
Our
business is conducted within Mainland China and is governed by PRC laws and regulations. The Mainland China legal system
is based on written statutes, and prior court decisions can only be used as a reference. Since 1979, the PRC government has promulgated
laws and regulations in relation to economic matters such as foreign investment, corporate organization and governance, commerce, taxation
and trade, with a view to developing a comprehensive system of commercial law, including laws relating to property ownership and development.
However, due to the fact that these laws and regulations have not been fully developed, and because of the limited volume of published
cases and the non-binding nature of prior court decisions, interpretation of PRC laws and regulations involves a degree of uncertainty.
Some of these laws may be changed without immediate publication or may be amended with retroactive effect. Depending on the government
agency or how an application or case is presented to such agency, we may receive less favorable interpretations of laws and regulations
than our competitors, particularly if a competitor has long been established in the locality of, and has developed a relationship with
such agency. In addition, any litigation in Mainland China may be protracted and result in substantial costs and a diversion of
resources and management attention. All of these uncertainties may cause difficulties in the enforcement of our land use rights, entitlements
under our permits and other statutory and contractual rights and interests.
Risks
Related to Our Common Stock
An
active trading market for our common stock may not develop, which may make it difficult for holders of our common stock to sell their
stock.
Our
common stock previously traded on the OTCQB under the symbol “WETH” and there was minimal trading in our common stock. Even
with the uplisting of our common stock on Nasdaq, we can offer no assurances that trading in our stock will improve over time.
Such thin trading may make it more difficult for you to liquidate your holdings in our common stock or negatively affect the price per
share that you are able to realize from such sales, and we cannot assure you that a liquid public market for our common stock will develop.
An active trading market for our shares may never develop or be sustained following this Underwritten Offering.
Further,
many brokerage firms will not process transactions involving low price stocks, especially those that come within the definition of a
“penny stock.” If we cease to be quoted, holders of our common stock may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of our common stock, and the market value of our common stock would likely decline.
In
addition, the initial price for our common stock in this Underwritten Offering is determined through negotiations with the underwriters
and may vary from the market price of our common stock following this Underwritten Offering. As a result of these and other factors,
you may be unable to resell your shares of our common stock at or above the initial public offering price. Further, an inactive trading
market for our shares may also impair our ability to raise capital by selling shares of our common stock or enter into strategic partnerships
and transactions by issuing our shares of common stock as consideration. If an active trading market for our common stock does not develop,
or is not sustained, you may not be able to sell your shares quickly or at the market price, or at all, and it may be difficult for you
to sell your shares without depressing the market price for our common stock.
Since
our By-laws provide that the courts in the State of Nevada are the sole and exclusive forum for substantially all disputes between us
and our shareholders, this could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors or officers, or employees.
Our
Amended and Restated By-laws provide that, unless we consent in writing to the selection of an alternative forum, the appropriate state
and federal courts in the State of Nevada shall be the sole and exclusive forum for any derivative action or proceeding brought on behalf
of the Company, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company
to the Company or the Company’s shareholders, any action asserting a claim arising pursuant to any provision of the Nevada Revised
Statutes, or any action asserting a claim governed by the internal affairs doctrine. This exclusive forum provision would not apply to
suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal
courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange
Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the
rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over
all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Any person
or entity purchasing or otherwise acquiring any interest in our Company shall be deemed to have notice of and consented to these provisions.
These
exclusive-forum provisions may limit a shareholder’s ability to bring a claim in a judicial forum of its choosing for disputes
with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other
employees.
Moreover,
if a court were to find the choice of forum provision contained in our Amended and Restated By-laws to be inapplicable or unenforceable
in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business,
results of operations, and financial condition. Even if we are successful in defending against these claims, litigation could result
in substantial costs and be a distraction to management and other employees.
The
trading price of our common stock is likely to be volatile, which could result in substantial losses to investors.
The
trading price of our common stock is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen
because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with
business operations located mainly in Mainland China that have listed their securities in the United States. In addition to market
and industry factors, the price and trading volume for our common stock may be highly volatile for factors specific to our own operations,
including the following:
● |
variations
in our revenues, earnings and cash flow; |
● |
announcements
of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors; |
● |
announcements
of new offerings, solutions and expansions by us or our competitors; |
● |
detrimental
adverse publicity about us, our brand, our services or our industry; |
● |
additions
or departures of key personnel; and |
● |
potential
litigation or regulatory investigations. |
Any
of these factors may result in large and sudden changes in the volume and price at which our common stock will trade.
In
the past, shareholders of public companies have often brought securities class action suits against those companies following periods
of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount
of our management’s attention and other resources from our business and operations and require us to incur significant expenses
to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our
reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be
required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
Short
sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third
party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from
a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the
short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s interest
for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding
the relevant issuer, its business prospects and similar matters calculated to or which may create negative market momentum, which may
permit them to obtain profits for themselves as a result of selling the stock short. Issuers whose securities have historically had limited
trading volumes and/or have been susceptible to relatively high volatility levels can be particularly vulnerable to such short seller
attacks.
The
publication of any such commentary regarding us by a short seller may bring about a temporary, or possibly long term, decline in the
market price of our common stock. No assurances can be made that we will not become a target of such commentary and declines in the market
price of our common stock will not occur in the future, in connection with such commentary by short sellers or otherwise.
In
connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2021 and 2022,
we identified certain material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an
effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent
fraud.
The
SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management
report on such company’s internal controls over financial reporting in its prospectus, which contains management’s assessment
of the effectiveness of internal controls over financial reporting.
Our
reporting obligations as a public company place a significant strain on our management and operational and financial resources and systems.
Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports
and are important to prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting
may result in the loss of investor confidence in the reliability of our financial statements, which in turn may harm our business and
negatively impact the trading price of our stock. Furthermore, we anticipate that we will continue to incur considerable costs and use
significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley
Act.
In
connection with the auditing of our consolidated financial statements as of and for the years ended December 31, 2021 and 2022,
we identified the following material weaknesses in our internal control over financial reporting:
|
|
● |
Inadequate
segregation of duties consistent with control objectives; |
|
|
● |
Lack
of formal policies and procedures; |
|
|
● |
Lack
of a functioning audit committee and independent directors on the Company’s board of directors to oversee financial reporting
responsibilities; and |
|
|
● |
Lack
of risk assessment procedures on internal controls to detect financial reporting risks on a timely manner. |
As
defined in the rules and regulations adopted by the SEC, a “material weakness” is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual
or interim financial statements will not be prevented or detected on a timely basis.
Management
has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness
are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:
|
● |
Continue
to search for and evaluate qualified independent outside directors; |
|
● |
Identify
gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company;
and |
|
● |
Continue
to develop policies and procedures on internal control over financial reporting and monitor the effectiveness of operations on existing
controls and procedures. |
We
have also engaged with a third-party financial consulting firm during the year to assist with the preparation of SEC reporting. We are
committed to maintaining a strong internal control environment, and believe that these remediation efforts will deliver improvements
in our control environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness
of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
However,
the implementation of these measures may not fully address these weaknesses in our internal control over financial reporting, and we
cannot conclude that they have been fully remedied. Our failure to correct these weakness and deficiencies or our failure to discover
and address any other weakness and deficiencies could result in our inability to accurately report our financial results, prevent or
detect fraud or provide timely and reliable financial and other information pursuant to the reporting obligations we have as a public
company, which could have a material adverse effect on our business, financial condition and results of operations. Further, it could
cause our investors to lose confidence in the information we report, which could adversely affect the price of our shares.
We
have considerable discretion as to the use of the net proceeds from this Underwritten Offering and we may use these proceeds in
ways with which you may not agree.
We intend to use the proceeds
from this Underwritten Offering primarily to enhance and expand our business operations and for general corporate purposes. However,
we have considerable discretion in the application of the proceeds. You will not have the opportunity, as part of your investment decision,
to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application
of the net proceeds of this Underwritten Offering. The net proceeds may be used for corporate or other purposes with which you do not
agree or that do not improve our profitability or increase our share price. The net proceeds from this Underwritten Offering may also
be placed in investments that do not produce income or that lose value.
If
we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to
expend significant resources to investigate and resolve the matter which could harm our business, operations and reputations, which could
result in a loss of your investment in our common stock.
U.S.
public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative
publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative
publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the
scrutiny, criticism and negative publicity, the publicly traded stock of many U.S.-listed Chinese companies has sharply decreased
in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC
enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our business. If we become the subject of any unfavorable allegations, whether
such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or
defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless,
our company and business operations will be severely hampered and your investment in our shares could be rendered worthless.
The
sale or availability for sale of substantial amounts of our common stock could adversely affect their market price.
Sales
of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect
the market price of our common stock and could materially impair our ability to raise capital through equity offerings in the future.
Shares held by our existing shareholders may be sold in the public market in the future subject to the restrictions in Rule 144 and Rule
701 under the Securities. As of the date of this prospectus, we have 9,732,948 shares of common stock issued and outstanding.
We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the
availability of these securities for future sale will have on the market price of our common stock.
Because
we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of our common stock for return on
your investment.
We
currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our
business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment
in our common stock as a source for any future dividend income.
Our
board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare
and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash
flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial
condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment
in our common stock will likely depend entirely upon any future price appreciation of our common stock. There is no guarantee that our
common stock will appreciate in value, or even maintain the price at which you purchased the common stock. You may not realize a return
on your investment in our common stock and you may even lose your entire investment in our common stock.
If
relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing the U.S. capital
markets.
At
various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies
may arise in the future between these two countries. Any political or trade conflicts between the United States and China could adversely
affect the market price of our common stock and our ability to access U.S. capital markets.
General
Risk Factors
Our
operating history may not be indicative of our future growth or financial results and we may not be able to sustain our historical growth
rates.
Our
operating history may not be indicative of our future growth or financial results. There is no assurance that we will be able to grow
in future periods. Our growth rates may decline for any number of possible reasons and some of them are beyond our control, including
decreasing customer demand, increasing competition, declining growth of the touchscreen industry in general, emergence of alternative
business models, or changes in government policies or general economic conditions. We will continue to expand our sales network and product
offerings to bring greater convenience to our customers and to increase our customer base and number of transactions. However, the execution
of our expansion plan is subject to uncertainty and the total number of items sold and number of transacting customers may not grow at
the rate we expect for the reasons stated above. If our growth rates decline, investors’ perceptions of our business and prospects
may be adversely affected and the market price of our common stock could decline.
Economic
recessions could have a significant, adverse impact on our business.
Our
revenues are generated from sales of our capacitive touchscreen products both domestically and internationally and we anticipate that
revenues from such sales will continue to represent the substantial portion of our total revenues in the near future. Our sales and earnings
can also be affected by changes in the general economy.
The
touchscreen industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in
business cycles of our customers, interest rate fluctuations, and other economic factors beyond our control. Deterioration in the economic
environment subjects our business to various risks, which may have a material and adverse impact on our operating results and cause us
to not reach our long-term growth goals. For example, a downturn in the economy could directly affect the discretionary spending power
of our customers and in turn, depress the number of orders for our products.
We
may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We
cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate intellectual
property rights held by third parties. We have not but in the future may be, subject to legal proceedings and claims relating to the
intellectual property rights of others. There could also be existing intellectual property of which we are not aware that our products
may inadvertently infringe. We cannot assure you that holders of intellectual property purportedly relating to some aspect of our technology
or business, if any such holders exist, would not seek to enforce such intellectual property against us in Mainland China, or
any other jurisdictions. If we are found to have violated the intellectual property rights of others, we may be subject to liability
for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced
to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time
and other resources from our business and operations to defend against these infringement claims, regardless of their merits. Successful
infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business
and operations by restricting or prohibiting our use of the intellectual property in question, and our business, financial position and
results of operations could be materially and adversely affected.
Further,
the application and interpretation of Mainland China’s patent laws and the procedures and standards for granting patents
in Mainland China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would
agree with our analysis.
We
may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We
regard our trademark, patents, know-how, proprietary technologies, and similar intellectual property as critical to our success. We may
become an attractive target to intellectual property attacks in the future with the increasing recognition of our brand. Any of our intellectual
property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient
to provide us with competitive advantages. In addition, there can be no assurance that (i) all of our intellectual property rights will
be adequately protected, or (ii) our intellectual property rights will not be challenged by third parties or found by a judicial authority
to be invalid or unenforceable.
Changes
in U.S. and international trade policies, particularly with regard to China, may adversely impact our business and operating results.
The
U.S. government has recently made statements and taken certain actions that may lead to potential changes to U.S. and international trade
policies, including recently-imposed tariffs affecting certain products manufactured in China. It is unknown whether and to what extent
new tariffs (or other new laws or regulations) will be adopted, or the effect that any such actions would have on us or our industry
and customers. Although cross-border business may not be an area of our focus, if we plan to sell our products internationally in the
future, any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for our
products and services, impact the competitive position of our products or prevent us from being able to sell products in certain countries.
If any new tariffs, legislation and/or regulations are implemented, or if existing trade agreements are renegotiated or, in particular,
if the U.S. government takes retaliatory trade actions due to the recent U.S.-China trade tension, such changes could have an adverse
effect on our business, financial condition, results of operations.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements
of historical fact, contained in this prospectus, including statements regarding our strategy, future financial position, projected costs,
prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,”
“contemplate,” “could,” “estimate,” “expect,” “intend,” “seek,”
“may,” “might,” “plan,” “potential,” “predict,” “project,” “target,”
“aim,” “should,” ‘will” “would,” or the negative of these words or other similar expressions
are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Forward-looking
statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.
The
forward-looking statements in this prospectus include, among other things, statements relating to:
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our
ability to secure sufficient funding to support our existing and proposed operations; |
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our
anticipated growth strategies and our ability to manage the expansion of our business operations effectively; |
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● |
our
expectations related to the use of proceeds from this Underwritten Offering; |
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● |
the
effects of increased competition in our markets and our ability to successfully compete with companies that are currently in, or
may in the future enter, the markets in which we operate; |
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● |
our
ability to maintain, protect, and enhance our brand and intellectual property; |
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● |
our
estimated market opportunity; |
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● |
the
potential impact of the COVID-19 outbreak on our business plans; and |
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our
ability to identify and complete acquisitions that complement and expand our business. |
We
may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place
undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, and expectations
disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this
prospectus, particularly in the “Risk Factor” section, that we believe could cause actual results or events to differ materially
from the forward-statements that we make. Furthermore, we operate in a competitive and rapid changing environment. New risks and uncertainties
emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking
statements contained in this prospectus.
You
should read this prospectus and the documents we reference in this prospectus and have filed as exhibits to the registration statement
of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from
what we expect. The forward-looking statements contained in this prospectus are made as of the date of this prospectus, and we do not
assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except
as required by applicable law.
In
addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These
statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms
a reasonable basis for such statements, such information may be limited or incomplete. Our statements should not be read to indicate
that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are
inherently uncertain and investors are cautioned not to unduly rely upon these statements.
MARKET
AND INDUSTRY DATA
This
prospectus contains estimates, projections and other information concerning our industry, our business and the markets for our products,
including data regarding the estimated size of such markets. We obtained the industry, market and similar data set forth in this prospectus
from our internal estimates and research and from industry research, publications, surveys and studies conducted by third parties. In
some cases, we do not expressly refer to the sources from which this data is derived. Information that is based on estimates, forecasts,
projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ
materially from events and circumstances that are assumed in this information. While we believe our internal research is reliable, such
research has not been verified by any third party. You are cautioned not to give undue weight to any such information, projections and
estimates.
USE
OF PROCEEDS
We
estimate that we will receive net proceeds from this Underwritten Offering of approximately $9,238,212, based on the public
offering price of $5.00 per share of common stock or approximately $10,744,812 if the underwriters exercise their option
to purchase additional shares in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable
by us.
We
plan to use the net proceeds of this Underwritten Offering as follows:
| |
Amount | | |
Percent | |
GROSS OFFERING | |
$ | 10,800,000 | | |
| | |
Commission
and Expense Allowance(a) | |
$ | 856,000 | | |
| | |
Estimated Offering expenses | |
$ | 705,787.65 | | |
| | |
Net Proceeds | |
$ | 9,238,212.35 | | |
| | |
USE OF NET PROCEEDS | |
| | | |
| | |
Construction and renovation
of new factory, facilities and office buildings1 | |
$ | 3,695,284 | | |
| 40 | % |
Purchase of two (2) production
line2 | |
$ | 923,821 | | |
| 10 | % |
Research and development3 | |
$ | 554,292 | | |
| 6 | % |
Working capital and general
corporate purposes4 | |
$ | 277,855 | | |
| 3 | % |
Repayment of convertible
promissory notes5 | |
$ | 2,586,960.59 | | |
| 28 | % |
Payment to Craft and Lafferty
pursuant to consent agreement6 | |
$ | 1,200,000.00 | | |
| 13 | % |
TOTAL APPLICATION OF NET PROCEEDS | |
| | | |
$ | 100.00 | % |
(a) |
Reflects
7.0% commission and $100,000 non-accountable expense allowance. |
|
|
1 |
We
intend to use approximately $3,695,284, or 40% of the net offering proceeds, for construction of new factory, facilities
and office buildings in Chengdu, Sichuan, China. |
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2 |
We
intend to use approximately $923,821, or 10% of the net offering proceeds, to purchase two (2) production lines in
the new factory for the production of our touchscreen products. |
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3 |
We
intend to use approximately $554,292, or 6% of the net offering proceeds, for research and development. |
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4 |
We intend to use approximately $277,855, or 3%
of the net offering proceeds, for working capital and general corporate purposes. |
|
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5 |
We intend to use approximately $2,586,960.59, or
28% of the net offering proceeds, for the repayment of convertible promissory notes. |
|
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6 |
Among others, as described below, we intend to pay Craft
Capital Management LLC (“Craft”) and R. F. Lafferty & Co., Inc. (“Lafferty”) $1,200,000 pursuant
to that certain consent agreement dated as of March 18, 2023, by and among the Company, Craft and Lafferty. |
The foregoing represents our
current intentions to use and allocate the net proceeds of this Underwritten Offering based upon our present plans and business
conditions. Our management, however, will have broad discretion in the way that we use the net proceeds of this Underwritten Offering.
Pending the final application of the net proceeds of this Underwritten Offering, we intend to use the net proceeds of this Underwritten
Offering primarily to enhance and expand our business operations and for general corporate purposes. See “Risk Factors—Risks
Related to Our Common Stock—We have considerable discretion as to the use of the net proceeds from this Underwritten Offering
and we may use these proceeds in ways with which you may not agree.”
In
utilizing the proceeds of this Underwritten Offering, we, as an offshore holding company, are permitted under PRC laws and regulations
to provide funding to our Mainland China subsidiary only through loans or capital contributions. Subject to satisfaction of applicable
government registration and approval requirements, we may extend inter-company loans to our Mainland China subsidiary or make additional
capital contributions to our Mainland China subsidiary to fund their capital expenditures or working capital. We cannot assure you that
we will be able to obtain these government registrations or approvals on a timely basis, if at all. For further information, see “Risk
Factors—Risks Relating to Doing Business in China— PRC regulation of loans to and direct investment in Mainland China entities
by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this
Underwritten Offering to make loans or additional capital contributions to our Chinese subsidiaries, which could materially and adversely
affect our liquidity and our ability to fund and expand our business.”
DIVIDEND
POLICY
We
do not anticipate declaring or paying, in the foreseeable future, any cash dividends on our capital stock. We intend to retain all available
funds and future earnings, if any, to fund the development and expansion of our business. Any future determination regarding the declaration
and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including
our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our
board of directors may deem relevant. See also “Risk Factors— Risks Related to Our Common Stock—Because we do not expect
to pay dividends in the foreseeable future, you must rely on a price appreciation of our common stock for return on your investment.
do not expect to declare or pay dividends in the foreseeable future.”
MARKET
PRICE
Market
Information
Our common stock was quoted
on the OTCQB under the symbol “WETH.” Our common stock has been approved for listing on Nasdaq under the symbol “WETH,”
and will begin trading on February 21, 2024.
Holders
As of February 9, 2024,
there were 417 stockholders of record of our common stock.
Dividends
We
have never declared or paid any cash dividends on our common stock. We intend to retain future earnings, if any, to finance the expansion
of our business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
CAPITALIZATION
The
following table sets forth our cash and cash equivalents and capitalization as of September 30, 2023:
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on
an actual basis; |
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|
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on
a pro forma as adjusted basis to give effect to the event above and the sale by us of 2,160,000 shares of our common stock
in this Underwritten Offering at a public offering price of $5.00 per share, after deducting underwriting discounts and estimated
offering expenses payable by us (assuming no exercise of the underwriter’s over-allotment option). |
You
should read this information together with our consolidated financial statements and related notes, as well as the information set forth
under the headings “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” appearing elsewhere in this prospectus.
| |
Actual | | |
Pro Forma As Adjusted | |
Cash and cash equivalents | |
$ | 93,936,779 | | |
$ | 103,174,991 | |
Indebtedness due within one year | |
| 1,234,355 | | |
| 1,234,355 | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Common stock, par value $0.001 per share; 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 | | |
| 11,893 | |
Additional paid-in capital | |
| 43,514,125 | | |
| 54,311,965 | |
Statutory reserve | |
| 6,040,961 | | |
| 6,040,961 | |
Retained earnings | |
| 72,692,092 | | |
| 71,130,304 | |
Accumulated other comprehensive income (loss) | |
| (10,537,660 | ) | |
| (10,537,660 | ) |
Total stockholders’ equity | |
| 111,719,251 | | |
| 120,957,463 | |
Total capitalization | |
| 104,003,069 | | |
| 113,241,281 | |
The
table above excludes:
|
(i) |
shares
of common stock issuable upon the conversion of outstanding convertible notes; |
|
(ii) |
shares of common stock issuable upon the exercise
of outstanding common stock purchase warrants; and |
|
(iii) |
49,680
shares of common stock underlying the warrants
to be issued to the Representatives in connection with this Underwritten Offering. |
DILUTION
If
you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering
price per share you will pay in this Underwritten Offering and the adjusted net tangible book value per share of our common stock after
this Underwritten Offering.
The
historical net tangible book value of our common stock as of September 30, 2023 was approximately $111,719,250, or $11.48
per share, based upon 9,732,948 shares of common stock outstanding on such date. Historical net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares
of common stock outstanding.
After
giving effect to the Underwritten Offering, our adjusted net tangible book value of our common stock will be $9.39 per share.
Adjusted net tangible book value per share represents adjusted net tangible book value divided by the total number of shares outstanding
after giving effect to the sale of the shares in this Underwritten Offering at the public offering price of $5.00 per share, after
deducting underwriting discounts and commissions and other estimated offering expenses payable by us. This represents an immediate decrease
in as adjusted net tangible book value of $2.09 per share to existing stockholders and an immediate accretion in net tangible
book value of $4.39 per share to investors purchasing shares of common stock in the Underwritten Offering at the assumed public
offering price.
The
following table illustrates this dilution on a per share basis to new investors:
Public offering price per share | |
$ | 5.00 | |
Net tangible book value per share as of September 30, 2023 | |
$ | 11.48 | |
As adjusted net tangible book value per share after giving effect to this Underwritten Offering | |
$ | 9.39 | |
Decrease in net tangible book value per share attributable to this Underwritten
Offering | |
$ | 2.09 | |
Accretion in net tangible book value per share to purchasers in this Underwritten Offering | |
$ | 4.39 | |
If
the underwriters’ over-allotment option is exercised in full, our adjusted net tangible book value following the Underwritten Offering
will be $10.02 per share, and the accretion to investors purchasing shares of common stock in the Underwritten Offering will be
$5.02 per share.
The
number of shares of common stock outstanding excludes shares of common stock issuable upon the conversion of outstanding convertible
notes and upon the exercise of stock options and warrants.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with our 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,” 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 prospectus.
Overview
We
were originally incorporated under the laws of the state of Nevada on August 31, 1992. On October 9, 2020, we entered into a share exchange
agreement (the “Share Exchange Agreement”) with BVI Wetouch, and all the shareholders of BVI Wetouch (each a “Shareholder”
and collectively the “Shareholders”), to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange
for the issuance to the Shareholders an aggregate of 28 million shares of our common stock (the “Reverse Merger”) (presented
on a pre-split basis of the 2023 Reverse Stock Split). The Reverse Merger closed on October 9, 2020. Immediately after the
closing of the Reverse Merger, we had a total of 31,396,394 issued and outstanding shares of common stock (presented
on a pre-split basis of the 2023 Reverse Stock Split). As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned
subsidiary.
Hong
Kong Wetouch Technology Limited, a limited company organized under the laws of Hong Kong (“HK Wetouch”), an affiliate of
Guangde Cai, our former 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 Vtouch Technology Co., Ltd., which was incorporated on December 30, 2020 (“Sichuan
Vtouch”) in Chengdu, Sichuan, under the PRC laws.
On
March 12, 2021, Wetouch Holding Group Limited (“BVI Wetouch”), the Company’s wholly owned subsidiary, 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 Hong Kong Wetouch, which, in turn, owns all the outstanding
shares of Sichuan Wetouch and (ii) all of the outstanding shares of HK Wetouch, which owns all the shares of Sichaun Vtouch Technology
Co., Ltd., a company incorporated under the PRC laws.
On
March 16, 2021, Sichuan Wetouch entered into an Agreement of Compensation on Demolition (“Compensation Agreement”) with Meishan
Huantian Industrial Co., Ltd, formerly named 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, China. 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.
In
order to minimize the interruption of our business, Sichuan Vtouch 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), which period was extended to October 31, 2022. On October
16, 2022, Sichuan Vtouch entered an extension to the Leaseback Agreement with Sichuan Renshou to
extend the period it granted Sichuan Vtouch to lease back the Properties until October 31,
2023, then subsequently extended to October 31, 2024, at a monthly rent of RMB400,000 (approximately $59,941).
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, 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).
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 prospectus, 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 October 31, 2024, but there is no assurance and we may need
extended time to achieve our business plan. Pursuant to local PRC government guidelines on local environment issues and the national
overall plan, Sichuan Wetouch was under the government directed relocation order to relocate no later than October 31, 2023 and was compensated
for RMB115.2 million ($17.8 million) from the local government 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.
On
March 2, 2021, HK Wetouch acquired all shares of Hong Kong Wetouch. Hong Kong Wetouch submitted its application for dissolution and was
dissolved on March 18, 2022. In addition, as of March 31, 2021, Sichuan Wetouch’s business and operations have been assumed by
Sichuan Vtouch.
Through
our wholly-owned subsidiaries, we are engaged in the research, development, manufacturing, sales and servicing of medium to large sized
projected capacitive touchscreens. We specialize in large-format touchscreens, which are developed and designed for a wide variety of
markets and used in the financial terminals, automotive, POS, gaming, lottery, medical, HMI, and other specialized industries. Our product
portfolio comprises medium to large sized projected capacitive touchscreens ranging from 7.0 inch to 42 inch screens. In terms of the
structures of touch panels, we offer (i) Glass-Glass (“GG”), primarily used in GPS/car entertainment panels in mid-size and
luxury cars, industrial HMI, financial and banking terminals, POS and lottery machines; (ii) Glass-Film-Film (“GFF”), mostly
used in high-end GPS and entertainment panels, industrial HMI, financial and banking terminals, lottery and gaming industry; (iii) Plastic-Glass
(“PG”), typically adopted by touchscreens in GPS/entertainment panels motor vehicle GPS, smart home, robots and charging
stations; and (iv) Glass-Film (“GF”), mostly used in industrial HMI.
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 the first quarter of 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.
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.
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. The Company experienced several shutdowns until the end of 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 prospectus, our Mainland China Subsidiary has resumed
normal operations.
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. The Company has taken proactive measures to promote
products to new customers and entering more regions. 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, including the duration and spread
of the outbreak and the impact on the Company’s customers, which are still uncertain and cannot be reasonably estimated at this
point of time.
Highlights
for the three-month period ended September 30, 2023 include:
|
● |
Revenues were $11.1
million, a decrease of 4.3% from $11.6 million in the third quarter of 2022 |
|
|
|
|
● |
Gross profit was $4.8
million, a decrease of 5.9% from $5.1 million in the third quarter of 2022 |
|
|
|
|
● |
Gross profit margin
was 42.9%, compared to 43.6% in the third quarter of 2022 |
|
|
|
|
● |
Net income was $2.9
million, compared to $3.3 million in the third quarter of 2022 |
|
|
|
|
● |
Total volume shipped
was 557,503 units, a decrease of 2.6% from 572,241 units in the third quarter of 2022 |
Results
of Operations
The
following table sets forth, for the periods indicated, statements of income data:
(in US Dollar millions, except percentage) | |
Three-Month
Period
Ended September
30, | | |
Change | | |
Nine-Month
Period
Ended September
30, | | |
Change | |
| |
2023 | | |
2022 | | |
% | | |
2023 | | |
2022 | | |
% | |
Revenues | |
$ | 11.1 | | |
$ | 11.6 | | |
| (4.3 | )% | |
$ | 37.3 | | |
$ | 35.4 | | |
| 5.4 | % |
Cost of revenues | |
| (6.3 | ) | |
| (6.6 | ) | |
| (4.5 | )% | |
| (20.2 | ) | |
| (20.9 | ) | |
| (3.3 | )% |
Gross profit | |
| 4.8 | | |
| 5.1 | | |
| (5.9 | )% | |
| 17.1 | | |
| 14.4 | | |
| 21.3 | % |
Total operating expenses | |
| (0.5 | ) | |
| (0.3 | ) | |
| 66.7 | % | |
| (2.4 | ) | |
| (2.2 | ) | |
| 9.1 | % |
Operating income | |
| 4.3 | | |
| 4.7 | | |
| (8.5 | )% | |
| 14.7 | | |
| 12.2 | | |
| 20.5 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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 | |
| 4.0 | | |
| 4.5 | | |
| (11.1 | )% | |
| 14.4 | | |
| 12.2 | | |
| 18.0 | % |
Income tax expense | |
| (1.1 | ) | |
| (1.2 | ) | |
| (8.3 | )% | |
| (4.1 | ) | |
| (3.4 | ) | |
| 20.6 | % |
Net income | |
$ | 2.9 | | |
$ | 3.3 | | |
| (12.1 | )% | |
$ | 10.3 | | |
$ | 8.8 | | |
| 17.0 | % |
Results
of Operations - Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
Revenues
We
generated revenue of $11.1 million for the three months ended September 30, 2023, a decrease of $0.5 million, or 4.3%, compared to $11.6
million in the same period of last year. This was mainly due to 5.7% negative impact from exchange rate due to depreciation 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 September
30, | |
| |
2023 | | |
2022 | | |
Change | | |
Change | |
| |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
| |
(in US Dollar millions except percentage) | |
Revenue from sales to customers in PRC | |
$ | 7.4 | | |
| 66.7 | % | |
$ | 8.1 | | |
| 69.8 | % | |
$ | (0.7 | ) | |
| (8.6 | )% |
Revenue from sales to customers overseas | |
| 3.7 | | |
| 33.3 | % | |
| 3.5 | | |
| 30.2 | % | |
| 0.2 | | |
| 5.7 | % |
Total Revenues | |
$ | 11.1 | | |
| 100 | % | |
$ | 11.6 | | |
| 100 | % | |
$ | (0.5 | ) | |
| (4.3 | )% |
| |
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 September 30, 2023, revenue from domestic market decreased by $0.7 million or 8.6% as a combined result 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 2.3% in the average RMB selling price of our products. For example, our POS touchscreens
had an increase of 16% of selling price due to the pricing control capability of the Company, compared with those of the same period
of last year.
As
for the RMB selling price, the increase of 2.3% was mainly due to the increased sales of new models of higher-end products such as POS
touchscreens, and industrial control computer touchscreens with higher selling prices in the domestic market during the three-month period
ended 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. Despite our proactive efforts to market new models such as POS touchscreens, medical touchscreens, and industrial
control computer touchscreens, and efforts to obtain new customers and penetrate into new regions, our sales decreased by 6.0% in South
China, 5.5% in Southwest China, and 2.2% in East China and during the three-month period ended September 30, 2023.
(ii)
Overseas market
For
the three-month period ended September 30, 2023, revenues from overseas market increased by 5.7% or $0.2 million as compared to the same
period of 2022, mainly due to the increase of 5.6% in sales 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.
The
following table summarizes the breakdown of revenues by categories in US dollars:
| |
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 machines 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.
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)).
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.
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 to high-end products
such as touchscreens used in medical touchscreen, automotive touchscreens, POS touchscreens, and 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 with better raw materials.
Gross
Profit and Gross Profit Margin
| |
Nine-Month
Period Ended September
30, | | |
Change | |
(in millions, except percentage) | |
2023 | | |
2022 | | |
Amount | | |
% | |
Gross Profit | |
$ | 17.1 | | |
$ | 14.4 | | |
$ | 2.7 | | |
| 18.8 | % |
Gross Profit Margin | |
| 45.7 | % | |
| 40.8 | % | |
| | | |
| 4.9 | % |
Gross
profit was $17.1 million during the nine-month period ended September 30, 2023, compared to $14.4 million in the same period of 2022.
Our gross profit margin increased to 45.7% for the nine-month period ended September 30, 2023 as compared to 40.8% for the same period
of 2022, primarily due to the increase of sales by 5.4%, particularly high-end products such as medical touchscreens, automotive touchscreens,
and 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.
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
| |
Nine-Month
Period Ended September
30, | | |
Change | |
(in millions, except percentage) | |
2023 | | |
2022 | | |
Amount | | |
% | |
General and Administrative Expenses | |
$ | 1.9 | | |
$ | 0.9 | | |
$ | 1.0 | | |
| 111.1 | % |
as a percentage of revenues | |
| 5.1 | % | |
| 2.5 | % | |
| | | |
| 2.6 | % |
General
and administrative (G&A) expenses were $1.9 million for the nine-month period ended September 30, 2023, compared to $0.9 million
in the same period in 2022, representing an increase of 111.1%, or $1.0 million. The increase was primarily due to the increase of accrued
$1.2 million underwriting fees in connection with a private placement, partially offset by the decrease 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).
Research
and Development Expenses
| |
Nine-Month
Period Ended September
30, | | |
Change | |
(in US dollars, except percentage) | |
2023 | | |
2022 | | |
Amount | | |
% | |
Research and Development Expenses | |
$ | 61,849 | | |
$ | 65,307 | | |
$ | (3,458 | ) | |
| (5.3 | )% |
as a percentage of revenues | |
| 0.0 | % | |
| 0.0 | % | |
| | | |
| 0.0 | % |
Research
and development (R&D) expenses were $61,849 for the nine-month period ended September 30, 2023 compared to $65,307 in the same period
in 2022.
Operating
Income
Total
operating income was $14.7 million for the nine-month period ended September 30, 2023 as compared to $12.2 million of the same period
of last year due to higher gross profit and lower selling expenses, partially offset by higher G&A expenses.
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 nine-month periods ended September 30, 2023 and 2022 were 28.5% and 27.9%, respectively. The effective
income tax rate for the nine-month period ended September 30, 2023 increase was primarily due to more taxable income for the nine-month
periods ended September 30, 2023.
Our
PRC subsidiary Sichuan Vtouch had $93.9 million of cash and cash equivalents of 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 $10.3 million in the nine-month period ended September 30, 2023 compared to a net
income of $8.8 million in the same period of 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 operations.
Financing may not be available in amounts or on terms acceptable to us, or at all.
As
of September 30, 2023, we had current assets of $109.1 million, consisting of $93.9 million in cash, $13.9 million in accounts receivable,
$0.2 million in inventories, and $1.0 million in prepaid expenses other current assets. Our current liabilities as of September 30, 2023,
were $7.3 million, which is comprised of $1.5 million in accounts payable, $3.1 million in accrued expenses, $1.1 million in income tax
payable, and other current 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 nine-month period
ended September 30, 2023 and 2022:
| |
Nine-Month
Period Ended September
30, | |
(in US Dollar millions) | |
2023 | | |
2022 | |
Net cash provided by operating activities | |
$ | 9.0 | | |
$ | 4.8 | |
Net cash provided by investing activities | |
| - | | |
| - | |
Net cash used in financing activities | |
| 39.9 | | |
| - | |
Effect of foreign currency exchange rate changes on cash and cash equivalents | |
| (6.2 | ) | |
| (5.4 | ) |
Net increase (decrease) in cash and cash equivalents | |
| 42.7 | | |
| (0.6 | ) |
Cash and cash equivalents at the beginning of period | |
| 51.2 | | |
| 46.1 | |
Cash and cash equivalents at the end of period | |
$ | 93.9 | | |
$ | 45.5 | |
Operating
Activities
Net
cash provided by operating activities was $9.0 million for the nine-month period ended September 30, 2023, as compared to $4.8 million
used in operating activities for the same period of the last year, primarily due to (i) the increase of $1.5 million net income for the
nine-month period ended September 30, 2023 as compared to the same period of 2022, (ii) the increase of $0.2 million loss on changes
of FV of common stock purchase warrants for the nine-month period ended September 30, 2023; (iii) the decrease of $1.8 million of accounts
receivable for the nine-month period ended September 30, 2023 due to faster collection of receivables, (iv) the decrease of $0.4 million
in inventories, (v) the increase of $1.8 million of accrued expenses and other current liabilities for the nine-month period ended September
30, 2023, partially offset by (vi) the decrease 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 ended September 30, 2023.
Investing
Activities
There
were nil investing activities for nine-month period ended September 30, 2023 and 2022.
Financing
Activities
Net
cash provided by financing activities for the nine-month period ended 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 September 30, 2023, our cash and cash equivalents were $93.9 million, as compared to $51.2 million at December 31, 2022.
Days
Sales Outstanding (“DSO”) has decreased to 83 days for the nine-month period ended September 30, 2023 from 81 days for the
year ended December 31, 2022.
The
following table provides an analysis of the aging of accounts receivable as of September 30, 2023 and December 31, 2022:
| |
September 30, 2023 | | |
December 31, 2022 | |
-Current | |
$ | 6,473,561 | | |
$ | 1,252,152 | |
-1-3 months past due | |
| 5,527,382 | | |
| 4,998,596 | |
-4-6 months past due | |
| 1,930,839 | | |
| 2,806,973 | |
7-12 months past due | |
| - | | |
| 20 | |
-greater than 1 year past due | |
| - | | |
| - | |
Total accounts receivable | |
$ | 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.
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.
Off
Balance Sheet Arrangements
We
have no off balance sheet arrangements.
Highlights
for the year ended December 31, 2022 include:
|
● |
Revenues were $37.9 million, a decrease of 7.1% from $40.8 million
for the year ended December 31, 2021 |
|
● |
Gross profit was $14.0 million, an decrease of 23.9% from $18.4
million for the year ended December 31, 2021 |
|
● |
Gross profit margin was 37.0%, as compared to 45.3% for the year
ended December 31, 2021 |
|
● |
Net income was $8.7 million, a decrease of 50.0% from $17.4 million
for the year ended December 31, 2021 |
|
● |
Total volume shipped was 1,916,976 units, a decrease of 0.3% from
1,922,353 units for the year ended December 31, 2021 |
Results
of Operations
The
following table sets forth, for the periods indicated, statements of income data:
(in US Dollar millions, except percentage) | |
For the Years
Ended December 31, | | |
Change | |
| |
2022 | | |
2021 | | |
% | |
Revenues | |
$ | 37.9 | | |
$ | 40.8 | | |
| (7.1 | )% |
Cost of revenues | |
| (23.9 | ) | |
| (22.4 | ) | |
| 6.7 | % |
Gross profit | |
| 14.0 | | |
| 18.4 | | |
| (23.9 | )% |
Total operating expenses | |
| (2.6 | ) | |
| (5.8 | ) | |
| (55.2 | )% |
Operating income | |
| 11.4 | | |
| 12.6 | | |
| (9.5 | )% |
Gain on asset disposal | |
| 0.0 | | |
| 7.6 | | |
| 0.0 | % |
Loss on conversion of notes payable | |
| (0.1 | ) | |
| - | | |
| N/A | |
Gain (loss) on changes of fair values of Common Stock Purchase Warrant | |
| 0.9 | | |
| 0.8 | | |
| 12.5 | % |
Income before income taxes | |
| 12.1 | | |
| 21.8 | | |
| (44.5 | )% |
Income tax benefit (expense) | |
| (3.4 | ) | |
| (4.4 | ) | |
| (22.7 | )% |
Net income | |
$ | 8.7 | | |
$ | 17.4 | | |
| (50.0 | )% |
For
the Years Ended December 31, 2022 and 2021
Revenues
Revenues were $37.9 million in the year ended
December 31, 2022, a decrease of $2.9 million, or 7.1%, compared with $40.8 million in the same period of last year. This was mainly
due to the decrease of 0.3% in sales volume, and a decrease of 2.7% in the average selling price of our products in RMB, and 4.4% negative
impact from exchange rate due to depreciation of RMB against US dollars, as compared with those of the same period of last year.
| |
For
the Years Ended December 31, | |
| |
2022 | | |
2021 | | |
Change | | |
Change | |
| |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
| |
(in
US Dollar except percentage) | |
Revenue
from sales to customers in Mainland China | |
$ | 26,440,376 | | |
| 69.7 | % | |
$ | 27,213,684 | | |
| 66.7 | % | |
$ | (773,307 | ) | |
| (2.8 | )% |
Revenue
from sales to customers overseas | |
| 11,482,736 | | |
| 30.3 | % | |
| 13,571,790 | | |
| 33.3 | % | |
| (2,089,054 | ) | |
| (15.4 | )% |
Total
Revenues | |
$ | 37,923,112 | | |
| 100 | % | |
$ | 40,785,474 | | |
| 100 | % | |
$ | (2,862,361 | ) | |
| (7.1 | )% |
| |
For
the Years Ended December 31, | |
| |
2022 | | |
2021 | | |
Change | | |
Change | |
| |
Unit | | |
% | | |
Unit | | |
% | | |
Unit | | |
% | |
| |
(in
UNIT, except percentage) | |
Units
sold to customers in Mainland China | |
| 1,295,097 | | |
| 67.6 | % | |
| 1,244,438 | | |
| 64.7 | % | |
| 50,659 | | |
| 4.1 | % |
Units
sold to customers overseas | |
| 621,879 | | |
| 32.4 | % | |
| 677,915 | | |
| 35.3 | % | |
| (56,036 | ) | |
| (8.3 | )% |
Total
Units Sold | |
| 1,916,976 | | |
| 100 | % | |
| 1,922,353 | | |
| 100 | % | |
| (5,377 | ) | |
| (0.3 | )% |
(i)
Domestic market
For the year ended December
31, 2022, revenue from domestic market decreased by $0.8 million or 2.8%, as a combined result of (i) a decrease of 2.6% in the average
selling price of our products in RMB, and (ii) 4.4% negative impact from exchange rate due to depreciation of RMB against US dollars,
and offset by (iii) an increase of 4.1% in sales volume, as compared with those of last year.
As
for the RMB selling price, the decrease of 2.6% was mainly due to the marketing initiatives to enhance sales of new models
of higher-end products such as touch screens used in POS touchscreens, medical touchscreens and gaming touchscreens in marketing regions
such as east of Mainland China during the year ended December 31, 2022.
The weakening in macroeconomic
conditions since the outbreak of COVID-19 pandemic continued to exacerbate the touch screen business environment. Since April 2022, the
Chinese government has imposed strict zero tolerance virus policies and the Company’s business has been negatively impacted and
has continued to generate lower revenues during the year ended December 31, 2022. Although the Company has taken proactive efforts to
market new models such as POS touchscreens and obtain new customers and penetrate into new regions with a sales increase of 0.8% in Eastern
Mainland China, the Company had a decrease of 1.6% in Southwest Mainland China, and of 0.5% in Southern Mainland China due to the government
lockdowns in this region during the year ended December 31, 2022.
(ii)
Overseas market
For the year ended December
31, 2022, revenue from overseas market was $11.5 million as compared to $13.6 million of the same period of 2021, a decrease of $2.1
million or 15.4%, mainly due to a decrease of 8.3% in sales volume primarily due to 1) the slack overseas orders; 2) negative effects
of COVID-19 impact, such as more strict customs inspection in Mainland China leading to delayed product shipment during the second half
of 2022, and a decrease of 7.8% in average selling price of our products due to the decreased higher pricing medical touchscreens during
the year ended December 31, 2022, compared with those of the same period of last year.
The
following table summarizes the breakdown of revenues by categories in US dollars:
| |
Revenues For
the Years Ended December 31, | |
| |
2022 | | |
2021 | | |
Change | |
| |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
| |
(in US Dollars, except percentage) | |
Product categories by end applications | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Automotive Touchscreens | |
$ | 9,293,357 | | |
| 24.5 | % | |
$ | 11,597,467 | | |
| 28.4 | % | |
$ | (2,304,110 | ) | |
| (19.9 | )% |
Industrial Control Computer Touchscreens | |
| 7,991,356 | | |
| 21.1 | % | |
| 7,988,346 | | |
| 19.6 | % | |
| 3,010 | | |
| 0.0 | % |
POS Touchscreens | |
| 6,556,348 | | |
| 17.3 | % | |
| 6,291,534 | | |
| 15.4 | % | |
| 264,814 | | |
| 4.2 | % |
Gaming Touchscreens | |
| 5,199,118 | | |
| 13.7 | % | |
| 5,831,529 | | |
| 14.3 | % | |
| (632,411 | ) | |
| (10.8 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Medical Touchscreens | |
| 5,050,067 | | |
| 13.3 | % | |
| 5,205,304 | | |
| 12.8 | % | |
| (155,237 | ) | |
| (3.0 | )% |
Multi-Functional Printer Touchscreens | |
| 3,822,054 | | |
| 10.1 | % | |
| 3,748,868 | | |
| 9.2 | % | |
| 73,186 | | |
| 2.0 | % |
Others* | |
| 10,812 | | |
| 0.0 | % | |
| 122,426 | | |
| 0.3 | % | |
| (111,614 | ) | |
| (19.9 | )% |
Total Revenues | |
$ | 37,923,112 | | |
| 100.0 | % | |
$ | 40,785,474 | | |
| 100.0 | % | |
$ | (2,862,362 | ) | |
| (7.1 | )% |
*Others
include applications in financial terminals, ticket vending machines, and self-service kiosks.
The
Company continued to shift production mix from traditional lower-end products such as touchscreens used in the automotive and industrial
control computer industries to high-end products such as touchscreens used in self-service kiosks, medical touchscreens, ticket vending
machine and financial terminals, primarily due to (i) greater growth potential of computer screen models in Mainland 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
| |
Years
Ended December
31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
Gross Profit | |
$ | 14 | | |
$ | 18.4 | | |
$ | (4.4 | ) | |
| (23.9 | )% |
Gross Profit Margin | |
| 37.0 | % | |
| 45.3 | % | |
| | | |
| (8.3 | )% |
Gross profit was $14.0
million during the year ended December 31, 2022, as compared to $18.4 million in the same period of 2021, representing a decrease of
$4.4 million, or 23.9%. Our gross margin was 37.0% during the year ended December 31, 2022, as compared to 45.3% for the year ended December
2021, primarily due to the decrease of sales by 7.1%, and the increase of 13.2% in cost of materials such as chip costs, partially offset
by the decrease of labor cost by 2.2%, depreciation and other overhead costs such as rent and electricity by 9.0% due to the reduced
production volume for the year ended December 31, 2022.
Selling Expenses
| |
Years
Ended December
31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
Selling Expenses | |
$ | 1.3 | | |
$ | 0.6 | | |
$ | 0.7 | | |
| 116.7 | % |
as a percentage of revenues | |
| 3.5 | % | |
| 1.5 | % | |
| | | |
| 2.0 | % |
Selling expenses were $1.3 million during the
year ended December 31, 2022, as compared to $0.6 million for the year ended December 31, 2021, primarily due to the increase of marketing
expenses of $0.7 million as the Company took promotional efforts to market new models such as POS touchscreens and obtain new customers
and penetrate into new regions in order to reduce the negative impact of COVID-19.
General
and Administrative Expenses
| |
Years
Ended December
31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
General and Administrative Expenses | |
$ | 1.3 | | |
$ | 1.9 | | |
$ | (0.6 | ) | |
| (31.6 | )% |
as a percentage of revenues | |
| 3.4 | % | |
| 4.7 | % | |
| | | |
| (1.3 | )% |
General
and administrative (G&A) expenses were $1.3 million for the year ended December 31, 2022, as compared to $1.9 million for the year
ended December 31, 2021, representing a decrease of 31.6%, or $0.6 million. The decrease was primarily due to i) $0.4 million loss of
VAT input credits due to Sichuan Wetouch ceasing operation and relocation to comply with local PRC government guidelines on local environmental
issues and the national overall plan, ii) $0.1 million accelerated amortization expense due to Sichuan Wetouch ceasing operation and
relocation to comply with local PRC government guidelines on local environmental issues and the national overall plan during the year
ended December 31, 2021 (See Note 5), iii) the decrease of $0.4 million miscellaneous fees, and partially offset by iv) an increase of
$0.3 million professional fees during the year ended December 31, 2022.
Research
and Development Expenses
| |
Years
Ended December
31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
Research and Development Expenses | |
$ | 85,251 | | |
$ | 89,477 | | |
$ | (4,226 | ) | |
| (4.7 | )% |
as a percentage of revenues | |
| 0.0 | % | |
| 0.0 | % | |
| | | |
| 0.0 | % |
Research and development (R&D) expenses were
$85,251 in the year ended December 31, 2022, compared to $89,477 in the same period in 2021, representing a decrease of $4,226, or 0.0%,
mainly due to the decrease of salary and welfare expenses of R&D personnel.
Share-based
Compensation
| |
Years
Ended December
31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
Share-based compensation | |
$ | 0.0 | | |
$ | 3.1 | | |
$ | (3.1 | ) | |
| (0.0 | )% |
as a percentage of revenues | |
| 0.0 | % | |
| 7.6 | % | |
| | | |
| (7.6 | )% |
Share-based compensation were nil and $3.1 million
for the years ended December 31, 2022 and 2021, respectively.
On January 1, 2021, the Board of Directors of the
Company authorized the issuance of an aggregate of 310,830 shares (15,541 shares post-Reverse Stock Split) and 631,080 warrants
(31,554 warrants post-Reverse Stock Split) to a consultant 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 during the year ended December
31, 2021.
Operating
Income
Total
operating income was $11.4 million for the year ended December 31, 2022 compared to $12.6 million for the year ended December 31,
2021, representing a decrease of $1.2 million or 9.5% due to lower gross profit and higher selling expenses, partially offset by the
lower G&A expenses and share-based compensation expenses.
Gain
on Asset Disposal
| |
Years
Ended December
31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
Gain on asset disposal | |
$ | 0.0 | | |
$ | 7.6 | | |
$ | (7.6 | ) | |
| 0.0 | % |
as a percentage of revenues | |
| 0.0 | % | |
| 20.5 | % | |
| | | |
| (20.5 | )% |
Gain on asset disposal was nil for the year ended
December 31, 2022 compared to $7.6 million for the year ended December 31, 2021. Pursuant to local PRC government guidelines on local
environmental issues and the national overall plan, Sichuan Wetouch was under the government directed relocation order to relocate no
later than December 31, 2021 and received 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 RMB115.2 million ($17.9 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 year ended December 31, 2021, the Company recorded a gain of $7,625,279
for the asset disposal.
Loss on conversion of notes payable
| |
Years
Ended December
31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
Loss on conversion of notes payable | |
$ | 0.1 | | |
$ | 0.0 | | |
$ | 0.1 | | |
| N/A | |
as a percentage of revenues | |
| 0.3 | % | |
| 0.0 | % | |
| | | |
| 0.3 | % |
Loss on conversion of notes
payable were $0.1 million for the year ended December 31, 2022, as lenders of convertible promissory note payable converted certain principal,
accrued and unpaid interest and default charges totaling $1,038,426 into 1,384,564 shares of common stock of the Company (69,228 shares
post-Reverse Stock Split), including two notes fully converted. As a result, the Company
recorded a loss on the conversion of notes payable of $0.1 million accordingly (see Note (9 (a)).
Gain on changes in fair value of Common Stock
Purchase Warrants
| |
Years Ended December 31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
Gain on changes in fair value of Common Stock Purchase Warrants | |
$ | 0.9 | | |
$ | 0.8 | | |
$ | 0.1 | | |
| 12.5 | % |
as a percentage of revenues | |
| 2.4 | % | |
| 2.0 | % | |
| | | |
| 0.4 | % |
Gain on changes in fair value of common stock
purchase warrants was $0.9 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively (See Note 9 (b)).
Income
Taxes
| |
Years
Ended December
31, | | |
Change | |
(in millions, except percentage) | |
2022 | | |
2021 | | |
Amount | | |
% | |
Income before Income Taxes | |
$ | 12.1 | | |
$ | 21.8 | | |
$ | (9.7 | ) | |
| (44.5 | )% |
Income Tax Benefit (Expense) | |
| (3.4 | ) | |
| (4.4 | ) | |
| 1.0 | | |
| (22.7 | )% |
Effective income tax rate | |
| 27.7 | % | |
| 20.2 | % | |
| | | |
| (7.5 | )% |
The effective income
tax rates for the years ended December 31, 2022 and 2021 were 27.1% and 20.2%, respectively. The effective income tax rate increased
during the year ended December 31, 2022 primarily due to Sichuan Wetouch’s preferential income tax rate for the same period of
2021.
Our Mainland China subsidiary
had $51.2 million of cash and cash equivalents at December 31, 2022, which are planned to be indefinitely reinvested in the PRC. The
distributions from our Mainland China 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 Mainland China business, we have not provided for deferred income tax
liabilities related to PRC withholding income tax on undistributed earnings of our Mainland China subsidiary.
Net
Income
As
a result of the above factors, we had a net income of $8.7 million for the year ended December 31, 2022 compared to net income of
$17.4 million for the year ended December 31, 2021.
LIQUIDITY
AND CAPITAL RESOURCES
Historically,
our primary uses of cash have been to finance working capital needs. We expect that we will be able to meet our needs to fund operations,
capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and
bank borrowings.
We
may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources
are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility.
The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness
would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations.
Financing may not be available in amounts or on terms acceptable to us, or at all.
As of December 31, 2022, we had current assets
of $62.2 million, consisting of $51.3 million in cash, $9.1 million in accounts receivable, $0.4 million in inventories, and $1.5 million
in prepaid expenses other current assets. Our current liabilities as of December 31, 2022, were $4.0 million, which is comprised of $1.4
million in accounts payable, $0.9 million in accrued expenses and other current liabilities, $0.4 million loan from a third party, and
$1.3 million convertible promissory notes payable.
The
following table sets forth a summary of our cash flows for the periods indicated.
|
|
Years Ended
December 31, |
|
(in US Dollar millions) |
|
2022 |
|
|
2021 |
|
Net cash provided by operating activities |
|
$ |
8.6 |
|
|
$ |
14.0 |
|
Net cash provided by investing activities |
|
|
- |
|
|
|
6.2 |
|
Net cash provided by (used) in financing activities |
|
|
(0.7 |
) |
|
|
1.9 |
|
Effect of foreign currency exchange rate changes on cash and cash equivalents |
|
|
(2.8 |
) |
|
|
0.1 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
5.1 |
|
|
|
22.2 |
|
Cash and cash equivalents at the beginning of period |
|
|
46.2 |
|
|
|
24.0 |
|
Cash and cash equivalents at the end of period |
|
$ |
51.3 |
|
|
$ |
46.2 |
|
Operating
Activities
Net cash provided by
operating activities was $8.6 million for the year ended December 31, 2022, as compared to $14.0 million provided by operating activities
for the year ended December 31, 2021, primarily due to (i) the decrease of $8.7 million net income for the year ended December 31, 2022
as compared to the same period of 2021, (ii) the decrease of $3.1 million of share-based compensation during the year ended December
31, 2022 , (iii) the increase of $6.5 million account receivable due to slower collection from the impact of the COVID-19 pandemic and
Sichuan Wetouch settling customer receivables during the year ended December 31, 2021; partially offset by (iv) the increase of $0.8
million of account payable due to the longer payment period (v) $7.6 million gain on asset disposal for the year ended December 31, 2021,
(vi) the decrease of $3.1 million prepaid expenses including amortization of $1.0 million prepaid marketing expenses during the year
ended December 31, 2022; (vii) 0.5 million of deferred income due to Sichuan Wetouch write-off government grant in the operating ceasing
process for the year ended December 31, 2021.
Investing
Activities
There were nil investing activities for the year
ended December 31, 2022.
There were $17.8 million in proceeds from asset
disposal for Sichuan Wetouch, and $0.2 million in purchase of property, plant and equipment for year ended December 31, 2021. See Note
5.
Financing
Activities
Net cash used in financing activities was $0.7
million for the year ended December 31, 2022, including $1.4 million of repayment of convertible promissory note payable (see Note 9
(a)), partially offset by a 0.4 million loan from a third party.
Net cash provided by financing activities was
$1.8 million for the year ended December 31, 2021 as a result of proceeds of $2.0 million from issuance of seven convertible promissory
notes, partially offset by the payment of issue cost of $0.2 million related to the notes financing (see Note 11).
As of December 31, 2022, our cash and cash equivalents
were $51.3 million, as compared to $46.2 million at December 31, 2021.
Days Sales Outstanding (“DSO”) has
decreased at 81 days for the year ended December 31, 2022 compared to 88 days for the year ended December 31, 2021.
The following table provides an analysis of the
aging of accounts receivable as of December 31, 2022 and December 31, 2021:
| |
December 31,
2022 | | |
December 31 2021 | |
-Current | |
$ | 1,252,152 | | |
$ | 1,403,187 | |
-1-3 months past due | |
| 4,998,596 | | |
| 2,827,048 | |
-4-6 months past due | |
| 2,806,973 | | |
| 3,742,732 | |
7-12 months past due | |
| 20 | | |
| 18,070 | |
-greater than 1 year past due | |
| - | | |
| - | |
Total accounts receivable | |
$ | 9,057,741 | | |
$ | 7,991,037 | |
The majority of the Company’s
revenues and expenses were denominated primarily in Renminbi (“RMB”), the currency of Mainland 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’s typical payment term is 180
days. Accounts receivables are written off against the allowances only after exhaustive collection efforts.
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.
COMMITMENTS
AND CONTINGENCIES
Legal Proceedings
From 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 December 31, 2022, the Company had several
legal claims or litigations. As of the date of this prospectus, all actions have been settled and Sichuan Wetouch, Hong Kong Wetouch
and Mr. Guangde Cai were unconditionally and fully discharged and released therefrom. For a discussion of the Company’s legal proceedings,
see Note 13 to the Consolidated Financial Statements contained in this prospectus.
Capital expenditure commitment
On December 20, 2021, the Company entered into
a contract with 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 December 31, 2022, the Company has prepaid RMB15.0 million (equivalent to US$2.2
million) and recorded as construction in progress (see Note 5) and had a remaining balance of RMB5.0 million (equivalent to US$0.7 million)
to be paid by the end of 2023.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as
of December 31, 2022.
Critical Accounting Policies
An accounting policy is considered critical if
it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate
is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are
reasonably likely to occur periodically, could materially impact the consolidated financial statements.
We prepare our financial statements in conformity
with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions
based on the most recently available information, our own historical experiences and various other assumptions that we believe to be
reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results
could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of
judgment than others in their application and require us to make significant accounting estimates.
The following descriptions of critical accounting
policies, judgments and estimates should be read in conjunction with our consolidated financial statements and accompanying notes and
other disclosures included in this registration statement. When reviewing our financial statements, you should consider (i) our selection
of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the
sensitivity of reported results to changes in conditions and assumptions.
Revenue
recognition
The
Company adopted Accounting Standards Codification (“ASC”) 606 using the modified retrospective approach. The adoption of
this standard did not have a material impact on the Company’s consolidated financial statements. Therefore, no adjustments to opening
retained earnings were necessary.
ASC
606, Revenue from Contracts with customers, establishes principles for reporting information about the nature, amount, timing and uncertainty
of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires
an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration
that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
ASC
606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company
(i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction
price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate
the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies
the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result
in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its
existing customer contracts and current accounting policies and practices to identify differences that would result from applying the
new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control
and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and
pattern of revenue recognition for its current revenue streams.
In
accordance to ASC 606, the Company recognizes revenue when it transfers its goods and services to customers in an amount that reflects
the consideration to which the Company expects to be entitled in such exchange. The Company accounts for the revenue generated from sales
of its products primarily to its customers in Mainland China and overseas, as the Company is acting as a principal in these transactions,
is subject to inventory risk, has latitude in establishing prices, and is responsible for fulfilling the promise to provide customers
the specified goods, which the Company has control of the goods and has the ability to direct the use of goods to obtain substantially
all the benefits. All of the Company’s contracts have one single performance obligation as the promise is to transfer the individual
goods to customers, and there is no separately identifiable other promises in the contracts. The Company’s revenue streams are
recognized at a point in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery.
The Company’s products are sold with no right of return and the Company does not provide other credits or sales incentive to customers.
The Company’s sales are net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities
in respect of product sales.
Contract
Assets and Liabilities
Payment terms are established on the Company’s
pre-established credit requirements based upon an evaluation of customers’ credit quality. Contract assets are recognized for in
related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery.
The contract liability balance can vary significantly depending on the timing when an order is placed and when shipment or delivery occurs.
As of December 31, 2022 and 2021, other than accounts receivable and advances from customers, the Company had no other material contract
assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Costs of fulfilling customers’
purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in selling, general
and administrative expense when incurred.
The Company generally warrants that its products
will substantially conform to the agreed-upon specifications for three years from the date of shipment. The Company’s liability
is limited to either a credit equal to the purchase price or replacement of the defective part. Returns, after sales services and technical
support under warranty have historically been immaterial. As such, the Company does not record a specific warranty reserve or consider
activities related to such warranty, if any, to be a separate performance obligation.
Disaggregation
of Revenues
The Company disaggregates its revenue from contracts
by geography, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are
affected by economic factors. The Company’s disaggregation of revenues for the years ended December 31, 2022 and 2021 are disclosed
in Note 14 to the financial statements.
Use
of estimates
In
preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
(“US GAAP”), management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant estimates
required to be made by management include, but are not limited to, the allowance for estimated uncollectible receivables, inventory valuations,
useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets, provision necessary for contingent
liabilities, revenue recognition and realization of deferred tax assets. Actual results could differ from those estimates.
Inventories
Inventory consists of raw
materials, work-in-process and finished goods and is stated at the lower of cost or net realizable value. Cost is determined using a
weighted average. For work-in-process and manufactured inventories, cost consists of raw materials, direct labor and an allocated portion
of the Company’s production overhead. The Company writes down excess and obsolete inventory to its estimated net realizable value
based upon assumptions about future demand and market conditions. For finished goods and work-in-process, if the estimated net realizable
value for an inventory item, which is the estimated selling price in the ordinary course of business, less reasonably predicable costs
to completion and disposal, is lower than its cost, the specific inventory item is written down to its estimated net realizable value.
Net realizable value for raw materials is based on replacement cost. Provisions for inventory write-downs are included in the cost of
revenues in the consolidated statements of operations. Inventories are carried at this lower cost basis until sold or scrapped. $74,100
and nil inventory write-off was recorded for the years ended December 31, 2022 and 2021, respectively.
Convertible
Promissory Notes
The
Company accounts for its convertible promissory notes according to guidance of ASU 2020-06, “Debt—Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for convertible instruments
by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required
to be accounted for as derivatives under Topic 815.
We
analyze the convertible notes for the existence of a beneficial conversion feature. The Company considered the three characteristics
of a derivative instrument listed in ASC 815-10-15-83: (i) having one or more underlying and one or more notional amounts or payment
provisions or both; (ii) requiring no initial net investment; and (iii) permitting net settlement.
Since
the Company’s notes have fixed interest rate, specified notional principal and settlement date, which no other events would affect
specified settlement, and the Company received net proceeds after issuance costs and discount, which the Company recorded as net proceeds
or net settled investment, the management assessed that the Notes do not meet the definition of a derivative instruments and an embedded
feature would not be bifurcated. The discounts on the convertible notes, are amortized to interest expense, using the effective interest
method, over the terms of the related convertible notes.
Common
stock purchase warrants
The
Company also analyzed the Warrants issued in the November and December 2021 financing in accordance with ASC 815, to determine whether
the Warrants meet the definition of a derivative and, if so, whether the Warrants meet the scope exception of ASC 815-40, which is that
contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’
equity shall not be considered to be derivative instruments for purposes of ASC 815-40.
The
Company concluded that the Warrants issued in the November and December 2021 financing should be treated as a derivative liability because
the Warrants are entitled to a price adjustment provision to allow the exercise price to be increased or reduced in the event the Company
issues or sells any additional shares of common stock at a price per share more or less than the then-applicable exercise price or without
consideration, which is typically referred to as a “Down-round protection” or “anti-dilution” provision. According
to ASC 815-40, the “Down-round protection” provision is not considered to be an input to the fair value of a fixed-for-fixed
option on equity shares which leads the Warrants to fail to be qualified as indexed to the Company’s own stock and then to fail
to meet the scope exceptions of ASC 815. Therefore, the Company accounted for the Warrants as derivative liabilities under ASC 815. Pursuant
to ASC 815, derivatives are measured at fair value and re-measured at fair value with changes in fair value recorded in earnings at each
reporting period.
The Company used a black-scholes-pricing model
to estimate the fair values of common stock purchase warrants at the balance sheet dates. As of December 31, 2022 and 2021, the Company
recorded $256,957 and $1,128,635 common stock purchase warrants liability, respectively, and $871,677 and $759,471 gain on change of
fair value of common stock purchase liability warrants for the year ended December 31, 2022 and 2021, respectively.
Income
taxes
The Company accounts for current income taxes
in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between
the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets
to the amount expected to be realized.
An uncertain tax position is recognized only if
it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified
as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during
the years ended December 31, 2022 and 2021. The Company does not believe there was any uncertain tax provision at December 31, 2022 and
2021.
The Company’s operating subsidiaries in
Mainland China are subject to the income tax laws of Mainland China. No significant income was generated outside Mainland China for the
fiscal years ended December 31, 2022 and 2021. As of December 31, 2022, all of the Company’s tax returns of its Mainland China
Subsidiaries remain open for statutory examination by Mainland China tax authorities.
Property,
plant and equipment, net
Property,
plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and
equipment is provided using the straight-line method over their expected useful lives, as follows:
|
|
Useful
life |
Buildings |
|
20
years |
Machinery
and equipment |
|
10
years |
Office
and electric equipment |
|
3
years |
Expenditures
for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures
for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated
depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated
statements of income and other comprehensive income in other income or expenses.
Impairment
of long-lived Assets
Long-lived
assets, such as property, plant and equipment, land use rights, are reviewed for impairment when events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and used
is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected
to be generated by the asset or asset group. If the carrying value of an asset or asset group exceeds its estimated undiscounted future
cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value of the asset or
asset group. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values
and third party independent appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or
fair value less costs to sell, and are no longer depreciated. No impairment of long-lived assets was recognized for any of the years
presented.
Share-Based
Compensation
The
Company awards share options and other equity-based instruments to its employees, directors and third party service providers (collectively
“share-based payments”). Compensation cost related to such awards is measured based on the fair value of the instrument on
the grant date. The Company recognizes the compensation cost over the period the employee is required to provide service in exchange
for the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect the expected forfeiture prior
to vesting. When no future services are required to be performed by the employee in exchange for an award of equity instruments, and
if such award does not contain a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes
compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite
service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals
the portion of the grant-date value of such award that is vested at that date.
Comprehensive
income
Comprehensive
income (loss) consists of two components, net income and other comprehensive income (loss). The foreign currency translation gain or
loss resulting from translation of the financial statements expressed in RMB to US$ is reported in other comprehensive income (loss)
in the consolidated statements of income and comprehensive income.
Recently
issued accounting guidance
The
Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews
new accounting standards that are issued.
In
August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments
by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting
models results in fewer embedded conversion features being separately recognized from the host contract as compared with current U.S.
GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are
not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception
from derivative accounting, and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded
as additional paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s
own equity to reduce form-over-substance-based accounting conclusions. For public business entities, the amendments in ASU 2020-06 are
effective for public entities which meet the definition of a smaller reporting company are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2023, including
interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning
after December 15, 2020, including interim periods within those fiscal years. The Company adopted
ASU 2020-06 effective January 1, 2021.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the
accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate
credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities
and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The
pronouncement will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 utilizing the modified
retrospective transition method. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated
financial statements.
In
December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The
amendment simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes.
It also clarifies certain aspects of the existing guidance to promote more consistent application, among other things. The guidance is
effective for interim and annual reporting periods beginning within 2021 with early adoption permitted.
In October 2021, the FASB issued ASU No. 2021-08,
which will require companies to apply the definition of a performance obligation under ASC Topic 606 to recognize and measure contract
assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination.
Under current U.S. GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including
contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No.
2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded
by the acquiree before the acquisition under ASC Topic 606. ASU No. 2021-08 is effective for fiscal years beginning after December 15,
2022, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its financial statements and the effects
will be based upon the contract assets and liabilities acquired in the future.
From
time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated
through issuance of ASUs. Unless otherwise discussed, the Company believes that the recently issued guidance, whether adopted or to be
adopted in the future, is not expected to have a material impact on its consolidated financial statements upon adoption.
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.
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 December 31, 2022, the RMB traded at 6.8972 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 Mainland China 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 2022 and 2021 were increases of 2.0%, and 0.9%, 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.
DESCRIPTION
OF BUSINESS
Overview
We
are a Nevada company incorporated on August 31, 1992, and conduct our business in Mainland China through our wholly-owned subsidiaries.
We
are engaged in the research, development, manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens.
We specialize in large-format touchscreens, which are developed and designed for a wide variety of markets and used in the financial
terminals, automotive, POS, gaming, lottery, medical, HMI, and other specialized industries.
Our
product portfolio comprises medium to large sized projected capacitive touchscreens ranging from 7.0 inch to 42 inch screens. In terms
of the structures of touch panels, we offer (i) Glass-Glass (“GG”), primarily used in GPS/car entertainment panels in mid-size
and luxury cars, industrial HMI, financial and banking terminals, POS and lottery machines; (ii) Glass-Film-Film (“GFF”),
mostly used in high-end GPS and entertainment panels, industrial HMI, financial and banking terminals, and the lottery and gaming industry;
(iii) Plastic-Glass (“PG”), typically adopted by touchscreens in GPS/entertainment panels motor vehicle GPS, smart home,
robotics and charging stations; and (iv) Glass-Film (“GF”), mostly used in industrial HMI.
Maintaining
the industry standards for product quality and sustainability is one of our core values. Touchscreens produced by us not only have long
life span with low maintenance, but also have strong anti-interference and anti-corrosion solutions, coupled with multi-touch capability
and high light-transmittance ratio and stability. As a high technology company, our Mainland China subsidiary has received certifications
from domestic and international institutions, such as ISO9001 Quality Management Systems (QMS) Certification of Registration, ISO 14001
Environmental Management System (EMS) Certification of Registration, and RoHS SGS Certification (Restriction of Hazardous Substance Testing
Certification).
We generate revenues through
sales of our various touchscreen products. For the nine months ended September 30, 2023 and 2022, we recognized approximately
$37.3 million and $35.4 million, respectively, in revenues. For the twelve months ended December 31, 2022 and 2021, we
recognized approximately $37.9 million and $40.8 million, respectively, in revenues.
We sell our touchscreen products
both domestically in China and internationally, covering major areas in Mainland China, including but not limited to the eastern, southern,
northern and southwest regions of Mainland China, Taiwan, South Korea, and Germany. We believe that we have established a strong and
diversified client base. For the nine months ended September 30, 2023 and 2022, our domestic sales accounted for 69.2%
and 69.2%, respectively, of our revenues, and our international sales accounted for 30.8% and 30.8%, respectively,
of our revenues. For the years ended December 31, 2022 and 2021, our domestic sales accounted for 69.7% and 66.7%, respectively, of our
revenues, and our international sales accounted for 30.3% and 33.3%, respectively, of our revenues.
Products
We
offer medium to large sized projected capacitive touchscreens, which can be categorized as set forth below:
Product
Type |
|
Description |
|
Application |
Product
type G+G
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_003.jpg)
|
|
This
is a double glass layer product, with a Solid clear adhesive (SCA) between a layer of conductive glass and a layer of tempered glass.
This type of touch screen has the advantage of being able to be easily manufactured, with relatively low cost. However, products
of this type in large sizes will require a greater degree of signal penetration and long distance transmission technology which will
be more technically challenging to achieve. |
|
Medium
and high end GPS/car entertainment, finance, POS and lottery machines. |
Product
type G+F+F
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_004.jpg)
|
|
This
product uses a double layer of conductive films, with an optically clear adhesive (OCA) between a layer of a tempered glass. The
product’s functionality comes from the interaction between the multiple layers of conductive film and glass, which does not
require extensive coating, lithography and etching. This type of product is anti- explosive and has relatively low manufacturing
cost. However, products of this type in large sizes will require greater degree of signal penetration and long distance transmission
technology which will be more technically challenging to achieve. |
|
Financial,
gaming and lottery, and medical industries |
Product
type P+G
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_005.jpg)
|
|
This
product uses a layer of conductive glass, with an optically clear adhesive (OCA) between a layer of surface intensify PMMA (Poly
Methyl methacrylate acid). The product’s functionality relies on the interaction between the layers of conductive glass. Like
the G+F+F type, this product does not require extensive coating, lithography and etching and has relatively low manufacturing cost. |
|
Motor
vehicle GPS, smart home, robots and charging stations |
Product
type G+F
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_006.jpg)
|
|
This
product uses a layer of conductive film, with an optically clear adhesive (OCa) between a layer of tempered glass. The product’s
functionality relies on the interaction between the layers of conductive glass. Like the G+F+F type, this product does not require
extensive coating, lithography and etching and has relatively low manufacturing cost. |
|
Industrial
HMI |
As of September 30, 2023,
product types G+F+F and G+G constitute our main stream products, accounting for approximately an average of 40.5% and 51.5%,
respectively, of our total revenues, with product types G+F and P+G and other raw materials accounting for 2.3%, 2.8% and
2.9%, respectively, of our total revenues. As of December 31, 2022, product types G+F+F and G+G constitute our main stream products,
accounting for approximately an average of 38.5% and 52.68%, respectively, of our total revenues, with product types G+F and P+G and
other raw materials accounting for 2.55%, 4.4% and 1.87%, respectively, of our total revenues. As of December 31, 2021, product types
G+F+F and G+G constitute our main stream products, accounting for approximately an average of 40.8% and 52.4%, respectively, of our total
revenues, with product types G+F and P+G and other raw materials accounting for 2.2%, 4.2% and 0.4%, respectively, of our total revenues.
Applications
of the Company’s Products
Our
products are used and applied in the production of a variety of products in a wide range of industries. Our products’ areas of
common application are set out below.
Point
of Sale (“POS”) Machines
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_007.jpg)
|
|
POS
machines, or point of sale machines, are used in a variety of retailers, including in department stores, supermarkets, convenience
stores, boutiques, restaurants, hotels, banks, logistics, telecommunication and other service industries. Due to the frequent use
of touchscreens on POS machines, Wetouch has adopted the use of high-end materials which give its products’ a competitive advantage
through their anti-scratch, high temperature resistance and long use life qualities. |
Car
Navigators and Entertainment Systems
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_008.jpg)
|
|
Touchscreen
products for car navigation and entertainment systems take advantage of the popularity of touchscreen consoles in motor vehicles.
Wetouch touchscreens are particularly suitable for motor vehicles GPS and entertainment systems, due to their resistance to temperature
variation. These touchscreens may be used in both inbuilt and external car systems. |
ATM
Machines and Other Financial Machines
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_009.jpg) |
|
ATMs and other similar machines
use touchscreens or have a touchscreen function. The touchscreens need to have high-endurance capacities as they are used by the general
public and are often located outdoors, such that these screens must withstand weathering. Wetouch’s products are particularly
suited to use in these machines as they are highly durable. |
Industrial
Equipment
|
|
Touchscreens
in the industrial sector have broad application, and play an important role in industrial HMI. Industrial HMI systems and equipment
often require touchscreen functions. These touchscreens must be resistant to interference, stable and have good touch sensitivity.
Wetouch’s products fully meet these requirements, being temperature variation resistant, dustproof and waterproof. |
Gaming
Machines
|
|
The
new generation of gambling machines are commonly adopting a touchscreen function. Gaming machines with a touchscreen function provide
an enhanced experience for uses via multi-touch sensory touch systems. Wetouch’s products are therefore popular amongst gambling
machine manufacturers. |
Lottery
Machines
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_012.jpg)
|
|
The
self-service lottery ticket vending machine is provided with an operator-oriented touch display device, an input device, a modem,
a cash register, printer and security authentication function. The touchscreen display facilitates easy and user-friendly operation
of the lottery machine. |
Ticket
Machines and Kiosks
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_013.jpg)
|
|
Self-service
ticket machines and kiosks contain touchscreen interfaces which are durable and have a long use life. These self-service machines
are used in daily lives, and as such there is a continuous demand for high quality and effective touchscreens. Wetouch’s products
are widely used in these ticketing machines and kiosks. |
For the nine-month period
ended September 30, 2023, we had approximately $37.3 million in revenues generated from the sales of automotive touchscreens,
accounting for 25.2%
of our total revenues, with industrial HMI touchscreens accounting for 19.8%, POS touchscreens for 15.8%, gaming touchscreens
accounting for 14.4%, medical touchscreens for 14.4%, multi-functional printer touchscreens for 9.9% and other touchscreen
products (applied in financial terminals, ticket vending machines, and self-service kiosks, etc.) accounting for 0.0% of our total
revenues. For the year ended December 31, 2022, we had approximately $9.3 million in revenues generated from the sales of automotive
touchscreens, accounting for 24.5% of our total revenues, with industrial HMI touchscreens accounting for 21.1%, gaming touchscreens
accounting for 13.7%, POS touchscreens for 17.3%, multi-functional printer touchscreens for 10.1%, medical touchscreens for 13.3% and
other touchscreen products (applied in financial terminals, ticket vending machines, and self-service kiosks, etc.) accounting for 0%
of our total revenues. For the year ended December 31, 2021, we had approximately $11.6 million in revenues generated from the sales
of automotive touchscreens, accounting for 28.4% of our total revenues, with industrial HMI touchscreens accounting for 19.6%, gaming
touchscreens accounting for 14.3%, POS touchscreens for 15.4%, multi-functional printer touchscreens for 9.2%, medical touchscreens for
12.8% and other touchscreen products (applied in financial terminals, ticket vending machines, and self-service kiosks, etc.) accounting
for 0.3% of our total revenues.
Customers
We have
five (5), six (6) and five (5) customers each accounting for more than 10% of our revenues for the nine months ended September
30, 2023 and the years ended December 31, 2022 and 2021, respectively.
For
the nine-month period ended September 30, 2023, we had a total number of 41 customers. Our top five customers,
namely (1) Siemens Industrial Automation Products (Chengdu) Co., Ltd., (2) Shanghai Sigang Electronics Co., Ltd., (3) E-Lead Electronic
Co. Ltd., (4) MultimediaLink Inc., and (5) Suzhou Weinview Co., Ltd. accounted for 22.0%, 16.1%, 15.9%, 14.4%, and 11.6%,
respectively, of our total revenues.
For
the year ended December 31, 2022, we had a total number of 41 customers. Our top six customers, namely (1) Siemens Industrial Automation
Products (Chengdu) Co., Ltd., (2) Shanghai Sigang Electronics Co., Ltd., (3) E-Lead Electronic Co. Ltd., (4) MultimediaLink Inc., (5)
Suzhou Weinview Co., Ltd., and (6) Canon (Suzhou) Ltd. accounted for 21.2%, 16.1%, 14.8%, 13.7%, 11.9% and 10.1%, respectively, of our
total revenues.
For the year ended December
31, 2021, we had a total number of 32 customers. Our top five customers, namely (1) Siemens Industrial Automation Products (Chengdu)
Co., Ltd., (2) E-Lead Electronic Co. Ltd., (3) Shanghai Sigang Electronics Co., Ltd., (4) MultimediaLink Inc., and (5) Suzhou Weinview
Co., Ltd., accounted for 19.53%, 17.33%, 14.53%, 14.24% and 11.13%, respectively, of our total revenues.
As Sichuan Wetouch’s
business and operations have been assumed by Sichuan Vtouch, Sichuan Vtouch entered into the above framework agreements, which were entered
into by Sichuan Wetouch previously, with our top five customers on December 31, 2021. The material terms of the sales framework agreements
with our top five customers provide:
|
● |
The term of each sales framework agreement is four (4) years, which
may be renewed by a separate agreement upon expiration. |
|
|
|
|
● |
Annual minimum purchase amount for period from January 1 to December
31 each year. |
|
|
|
|
● |
We will send the price list to the customers at the beginning of
each year. The specific execution price is subject to the order signed by the parties. |
|
|
|
|
● |
We have the right to adjust the price due to the market or other
factors. When there is adjustment, we shall send a written notice of change of the price 30 days in advance. |
|
|
|
|
● |
For the first year, we grant the customers a credit limit of $1.5
million and a credit line of 3 months. During supply, the portion of payment that exceeds the credit line shall be paid before goods
are delivered. In the next year, the credit will be increased according to the sales of the previous year, which shall be subject
to the negotiation of both parties. |
|
|
|
|
● |
The customers shall make payment in full and on time according to
the payment method and time of the purchase order and shall not delay or refuse to pay. If the customers fail to make payment within
the agreed period of the purchase order and still fail to make payment after being urged by us, we may stop the supply and have the
right to demand payment of a late fee of 0.3% of the contract amount per day from the customers; If the customers still refuse to
make payment after 30 days of notice from us, we have the right to file a lawsuit with the court. The customers shall bear the litigation
costs, lawyer’s fees, and other debt recovery costs. |
|
|
|
|
● |
We are required to provide products to customers pursuant to the
delivery date and quantity, requirements included in the purchase orders and shall negotiate with customers if we are unable to so
provide. |
|
|
|
|
● |
The customers are entitled to compensation of losses due to our
failure to provide after-sale services. |
|
|
|
|
● |
Any violation of the terms of the agreements may result in the termination
of the agreements and the breaching party shall be responsible for all business and economic losses and legal liabilities arising
therefrom. |
Minimum
Purchase Requirements
Although the material terms of
our sales framework agreements with our major customers are identical, the minimum purchase amounts differ depending on the particular
customer. If the customer fails to purchase the minimum purchase amount in the applicable agreement, the customer will be deprived
of the most favorable price treatment for the following year and rebate rewards for the current year. For E-Lead Electronic Co. Ltd.,
the minimum purchase amounts are approximately $9.5 million for 2022, $10.5 million for 2023, $12 million for 2024, and $14 million for
2025. For MultimediaLink Inc., the minimum purchase amounts are approximately $9.5 million for 2022, $10.5 million for 2023, $11.5 million
for 2024, and $12.5 million for 2025. For Suzhou Weinview Co., Ltd., the minimum purchase amounts are approximately $63 million for 2022,
$70 million for 2023, $78 million for 2024, and $85 million for 2025. For Siemens Industrial Automation Products (Chengdu) Co., Ltd.,
the minimum purchase amounts are approximately $65 million for 2022, $72 million for 2023, $80 million for 2024, and $90 million for
2025. For Shanghai Sigang Electronics Co., Ltd., the minimum purchase amounts are approximately $65 million for 2022, $70 million for
2023, $75 million for 2024, and $80 million for 2025. For Canon (Suzhou) Ltd., the minimum purchase amounts are approximately $53
million for 2022, $60 million for 2023, $70 million for 2024, and $80 million for 2025.
For the nine-month period
ended September 30, 2023 and years ended December 31, 2022 and 2021, we did not provide any extended payment terms to any of our
customers. Our customers are required to make full payment within three to five months from delivery date, although our typical payment
term is 180 days from delivery. As a result of the COVID-19 outbreak in January 2020, collection activities from some of our customers
affected by the pandemic resulted in longer payment terms. We impliedly granted extended payment terms until December 31, 2020 to some
of our customers. As of December 31, 2020, we collected all overdue accounts receivable by the end of this year and resumed our typical
payment term.
We source our customers through
multiple channels: (i) from our own research through Search Engine Optimization (“SEO”) and outreach, (ii) through referrals
from our present customers, (iii) through our websites; and (iv) through industry exhibitions/expos.
Our
main target markets are economically developed countries and regions, including eastern, southern, northern and southwest regions of
Mainland China, South Korea, and Germany. We believe that we have established a strong client base, including global well-known
institutional customers. Overseas sales were $11.5 million in 2022 as compared to $13.6 million in 2021.
We target these overseas customers
mainly via our online marketing efforts. In order to market our products, occupy more market share and secure more quality customer, we
frequently participate in, and promote our products at, specific touchscreen technology exhibitions held internationally.
In addition to the top five (5)
customers, we also have sales framework agreements with our major customers and direct purchase orders with our other customers. In the
past three years, we have entered into approximately 700 orders under both sales framework agreements and through direct purchase
orders.
The
key terms of the framework agreements with our major customers have similar terms with our top five (5) customers as above mentioned.
The key terms of the purchase order provide the following:
|
○ |
The
product name, specification, quantity, price, order amount and delivery date are specified in each order. |
|
|
|
|
○ |
Delivery
method and packaging requirements are specified in each order |
|
|
|
|
○ |
Payment
terms are specified in each order. |
|
|
|
|
○ |
Breach
of order terms by customers in some orders. |
|
|
|
|
○ |
Guaranty
terms in some orders. |
Pursuant to the purchaser orders,
either through frame agreements or direct orders, our Mainland China subsidiary is obligated to provide 1) products per the specific
requirements of the orders, and 2) unconditional defect guaranty for our products. Any violation of the order terms may result in termination
of the orders or replacement of our products.
As of the date of the prospectus,
our Mainland China subsidiary has never violated any framework agreements or purchase orders in material aspects and therefore
never incurred any economic losses as a result of our agreements; no penalty has ever been incurred by us due to our delay of delivering
products and our Mainland China subsidiary has always complied with all material terms set forth in the frame agreements and purchase
orders.
For the nine-month period
ended September 30, 2023, the revenues generated from our domestic customers amounted to approximately $25.8 million, constituting
approximately 69.2% of our total revenues, with overseas customers accounting for approximately $11.5 million, constituting
approximately 30.8%. For the year ended December 31, 2022, the revenues generated from our domestic customers amounted to approximately
$26.4 million, constituting approximately 69.7% of our total revenues, with overseas customers accounting for approximately $11.5 million,
constituting approximately 30.3% of our total revenues, respectively. For the year ended December 31, 2021, the revenues generated from
our domestic customers amounted to approximately $27.2 million, constituting approximately 66.7% of our total revenues, with overseas
customers accounting for approximately $13.6 million, constituting approximately 33.3% of our total revenues, respectively.
Our Suppliers
Our Mainland China subsidiary
has no supply agreements with our suppliers. We can utilize any supplier we determine and there are no minimum purchase requirements
when we place orders with our suppliers.
We place purchase orders with
suppliers of raw materials for the production of our products. In the past three years, our Mainland China subsidiary has
entered into over 4,000 purchase orders. The general terms of the purchase order include:
|
○ |
The
product name, specification, quantity, price, order amount and delivery date are specified in each order. |
|
|
|
|
○ |
Delivery
method, packaging, inspection, breach terms and dispute resolution are determined in accordance with each order. |
|
|
|
|
○ |
Payment
terms are specified in each order. |
|
|
|
|
○ |
The
products supplied must adhere to the nationally prescribed quality standards or industry standards. Each product order must be accompanied
by the supplier’s product quality certification. |
|
|
|
|
○ |
The
supplier will unconditionally accept returns and refund in full the purchase price for the products or make replacements if the products
supplied do not meet industry or nationally prescribed quality standards, are damaged or significantly different than the same product. |
As
of September 30, 2023, we have a total number of 112 suppliers. We do not consider
any of our suppliers to be material to our business and we can utilize any supplier we determine
at our sole discretion. Although we can utilize any supplier we determine, we believe that
we established healthy and stable relationships with our significant suppliers. 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 11.9% (one supplier) of the Company’s total raw
material purchases for the nine-month period ended September 30, 2023. Raw
material purchases from these suppliers which individually exceeded 10% of the Company’s
total raw material purchases, accounted for approximately 47.2% (four suppliers) and 11.2%
(one supplier) of the Company’s total raw material purchases for the years ended December
31, 2022 and 2021, respectively. Our Mainland China subsidiary does not have supply agreements
with any of them and all of our raw material procurement with them are processed through
our Mainland China subsidiary’s purchase orders. There are no minimum purchase requirements
with any of our suppliers, including these three significant ones.
These
purchase order forms with our significant suppliers contain the following identical material terms:
|
○ |
The
product name, specification, quantity, price, order amount and delivery date are specified in each order. |
|
|
|
|
○ |
Delivery
method, location and transportation fee arrangements, packaging, payment terms, breach terms and dispute resolution are specified
in each order. |
|
|
|
|
○ |
Suppliers
are responsible for shipment fees and all risks of products in transit. |
|
|
|
|
○ |
Inspection
standards are specified in each order. The products supplied must adhere to the nationally prescribed quality standards or industry
standards, or sample specifications confirmed by the parties. The Company is entitled to request replacement or order cancellation
if the supplied raw materials fail to pass the inspection. |
|
|
|
|
○ |
Except
for force majeure, any party in breach of the order terms is obligated to pay 20% of the contract amount as liquidated damages. |
Marketing
and Sales
The
Company has adopted a made-to-order production model as follows:
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_014.jpg)
This
process is subject to continuous review and monitoring by the management team in consultation with engineers, electricians and other
technical experts to ensure that finished products are of the highest quality and meet customer requirements and ISO9001 Quality Management
Systems (QMS) standard.
In
order to the maintain product safety and a high standard of product quality, the Company implements a strict set of quality control policies
and inspection protocols. These policies and protocols are enforced by the Company’s senior management and officers along every
step of the production to post-production process. Their management guidelines along with key company quality policies are set out below:
The
Company has strict production standards in place that governs what constitutes acceptable quality for its products. This ensures that
the Company’s products fulfill product certification standards. The production team adheres to the following criteria when making
its product standard assessment:
Item |
|
Industry
Standards |
|
Wetouch’s
Standards |
Reaction
time |
|
Less
than or equal to 5 milliseconds |
|
Less
than or equal to 5 milliseconds |
|
|
|
|
|
Surface
hardness |
|
6H |
|
7H~9H |
|
|
|
|
|
Operational
temperature |
|
0~70
degrees Celsius |
|
-30~80
degrees Celsius |
|
|
|
|
|
EsD
requirement |
|
6~12KV |
|
8~15KV |
|
|
|
|
|
Transparency |
|
86% |
|
88% |
|
|
|
|
|
Touch
conditions |
|
Normal
touch and ordinary conditions |
|
Waterproof
and anti-saline solution and anti-corrosion and Anti interference |
The
products are inspected before they are delivered and sold to our customers. All products must pass the following inspections:
|
● |
Cosmetic
inspection: conducted under optimum temperatures (20-22 degrees Celsius) and white fluorescent lighting. The product is observed
by the naked eye to spot for any defects, scratches and cracks, panel discoloration, opacity, foreign fibers and spots. The Company
has in place quantitative standards with respect to each of these areas to determine the level of cosmetic acceptability. |
|
|
|
|
● |
Function
tests: all products undergo functionality testing. Touchscreen products are connected electronically via standard cabling systems
to computers, to measure and test for effective functionality and to screen for any abnormalities. |
|
|
|
|
● |
Stress
testing: all products undergo product stress testing by being subject to humidity, temperature and corrosion stress testing. The
products are tested for their functionality in high and low humidity environments as well as in extreme temperatures. The products
are inspected to determine whether damage or physical change is caused by exposure to high and low temperatures. |
|
|
|
|
● |
Third
party organizations are engaged to conduct independent testing for hazardous substances. The products are also tested for their corrosive
resistance to saline solutions. |
The
Company’s products are produced to order and are marketed directly by its own sales personnel. The Company does not rely on distributors
to sell its products.
Seasonality
of Business
There
is no significant seasonality in our business.
Inventory
Inventory
consists of raw materials, work-in-process and finished goods. Because a large percentage of the Company’s orders require products
to be shipped in the same quarter in which the order was received, and because orders in the inventory may be canceled and delivery schedules
may be changed, the Company’s inventory at any particular date is not necessarily indicative of actual sales for any succeeding
period.
Research
and Development
We
are committed to our own research and development projects as well as partnership initiatives in order to continuously and systematically
upgrade our touchscreen technology. As of the date of the prospectus, we have 6 employees in our R&D department.
Intellectual
Property
Our business is dependent on
a combination of trademarks, patents, domain names, trade names, trade secrets and other proprietary rights in order to protect our intellectual
property rights. As of the date of this prospectus, we have one registered trademark in Mainland China under Sichuan Vtouch and
eight registered patents in Mainland China under our former Mainland China subsidiary, Sichuan Wetouch.
Trademarks
Set
forth below is a detailed description of our current trademarks:
Country |
|
Trademark |
|
Application
Date |
|
Registration
Number |
|
Registration
Date |
|
Classes |
|
Assignment
Application Number |
|
Owner |
|
Status |
China |
|
WeTouch
* |
|
09/28/2011 |
|
10019079 |
|
01/28/2013 |
|
9 |
|
20210000091399 |
|
Sichuan
Vtouch |
|
Registered |
Patents
Set
forth below is a detailed description of our registered patents under our former Mainland China subsidiary, Sichuan Wetouch, which
we are currently in the process of assigning to our Mainland China subsidiary, Sichuan Vtouch:
Patent
Certificate No. |
|
Patent
No. |
|
Patent
Name |
|
Patent
Application Date |
|
Patent
Type |
|
Patent
Term |
|
Owner |
|
Status |
3700175 |
|
ZL201420086995.3 |
|
Dispenser
tube support structure |
|
02/28/2014 |
|
Utility
Model |
|
10
years from Patent Application Date |
|
Sichuan
Wetouch |
|
Registered |
3701522 |
|
ZL201420084742.2 |
|
Antistatic
capacitive touchscreen |
|
02/27/2014 |
|
Utility
Model |
|
10
years from Patent Application Date |
|
Sichuan
Wetouch |
|
Registered |
3703829 |
|
ZL201420084735.2 |
|
Anti-electromagnetic
interference capacitive touchscreen |
|
02/27/2014 |
|
Utility
Model |
|
10
years from Patent Application Date |
|
Sichuan
Wetouch |
|
Registered |
3704079 |
|
ZL201420084741.8 |
|
High
sensitive and projected capacitive touchscreen |
|
02/27/2014 |
|
Utility
Model |
|
10
years from Patent Application Date |
|
Sichuan
Wetouch |
|
Registered |
3704825 |
|
ZL201420087006.2 |
|
Compression
panels of screen laminating machines |
|
02/28/2014 |
|
Utility
Model |
|
10
years from Patent Application Date |
|
Sichuan
Wetouch |
|
Registered |
6146599 |
|
ZL201620733872.3 |
|
Cooling
capacitive touchscreen |
|
7/
13/ 2016 |
|
Utility
Model |
|
10
years from Patent Application Date |
|
Sichuan
Wetouch |
|
Registered |
6204352 |
|
ZL201620734173.0 |
|
OGS
Touchscreen |
|
7/
13/ 2016 |
|
Utility
Model |
|
10
years from Patent Application Date |
|
Sichuan
Wetouch |
|
Registered |
6387677 |
|
ZL201620733760.8 |
|
Size-adjustable
universal type capacitive touchscreen |
|
7/
13/ 2016 |
|
Utility
Model |
|
10
years from Patent Application Date |
|
Sichuan
Wetouch |
|
Registered |
We
have applied for five (5) patents
with the Patent Office of China National Intellectual Property Administration (“Patent Office”). As of the date of this prospectus,
they are still pending.
Set
forth below is a detailed description of our pending patents:
Patent
Application No. |
|
Patent
Name |
|
Patent
Application Date |
|
Patent
Type |
|
Patent
Applicant |
|
Status |
202120500187.7 |
|
Low
cost anti-rupture projected capacitive touchscreen |
|
03/09/2021 |
|
Utility
Model |
|
Sichuan
Vtouch |
|
Pending |
202120500188.1 |
|
High
performance and anti-electromagnetic radiation projected capacitive touchscreen |
|
03/09/2021 |
|
Utility
Model |
|
Sichuan
Vtouch |
|
Pending |
202120500155.7 |
|
Full-lamination
projected capacitive touchscreen |
|
03/09/2021 |
|
Utility
Model |
|
Sichuan
Vtouch |
|
Pending |
202110256476.1 |
|
Anti-scratch
glass structure capacitive touchscreen |
|
03/09/2021 |
|
Invention |
|
Sichuan
Vtouch |
|
Pending |
202111206650.8 |
|
An enhanced anti-static projection capacitive screen |
|
10/17/2021 |
|
Invention |
|
Sichuan Vtouch |
|
Pending |
Patents registered in Mainland
China cannot be enforced in other jurisdictions to which the Company supplies its products. We currently have registered patents
only in Mainland China. We plan to submit patent registration applications in our target market jurisdictions including United
States, Europe, Australia, Japan, Korea, Taiwan, India and Russia. The estimated costs for these patent registrations would be approximately
$160,000. We estimate that it may take two to three years to obtain the patent registrations in the above countries.
Environmental
Issues
Our business in Mainland China
is subject to various pollution control regulations in Mainland China with respect to noise, water and air pollution and the
disposal of waste. Specifically, the major environmental regulations applicable to us include the PRC Environmental Protection Law, the
PRC Law on the Prevention and Control of Water Pollution, the PRC Law on the Prevention and Control of Air Pollution, the PRC Law on
the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.
Our Mainland China subsidiary
originally received Pollutant Discharge Permit from Renshou County environmental protection agency, which expired on May 15, 2019. Pursuant
to a Statement on Change of Pollutant Discharge Permit to Stationary Pollution Source Registration Form dated September 1, 2020, the
environmental protection system in Renshou County, Sichuan, was changed from permission to registration due to local administrative division
change. Therefore, upon submission of all required documentation, our Mainland China subsidiary is registered under the new system
by issuance of the Stationary Pollution Source Registration Form.
The
Company is not aware of any investigations, prosecutions, disputes, claims or other proceedings in respect of environmental protection,
nor has the Company been punished or can foresee any punishment to be made by any environmental administration authorities of the PRC.
Competitive
Strength
We
are dedicated to the production of high quality products that are tailored to the customers’ requirements and commercial needs.
Our competitive strengths include:
● |
Our
economy of scale lowers our cost and appeals to big clients with large quantity purchase orders; |
|
|
● |
Our
centralized manufacturing facility enables us to produce all different products within the same location with batch consistency and
quality assurance; |
|
|
● |
Our
proprietary technology allows us to produce touchscreens with high light-transmittance ratio and stability, low maintenance with
minimal or no need of recalibration after production, long life span, anti-interference, anti-corrosion and multi-touch capability,
supporting up to 20 points of contact with the screen and 20 gestures, and in different structures and sizes for a wide range of
different applications. |
Our
Growth Strategies
We
will continue to adhere to our business principles of providing high quality and safe products to our consumers and promoting social
responsibility. We believe that our pursuit of these goals will lead to sustainable growth driven by our capacity expansion based on
market demand, solidify our position in the industry, and create long-term value for our shareholders, employees and other stakeholders.
● |
Improve
existing technology. We intend to improve our existing technology and occupy more market share. Our products are categorized
into the following three main structures: GG (Glass + Glass), GFF (Glass + Film + Film), and PG (Plastic Glass). GG is mainly used
in the automobile and banking and finance industries. We plan to make technological improvements on GG structure and mainly focus
on improving its production capability and delivering quality products for brand customers. GFF is mostly applied in industrial HMI,
and the lottery and gaming industry. We plan to continue to concentrate on high-end industrial HMI products. PG is primarily employed
in the smart home, robotics and charging stations industries. We plan to upgrade the production line of PG to improve its production
capability and increase its adaptability to changes in product size. We have developed the industry 4.0 intelligent system, which
is still under testing as of the date of this prospectus. Upon successfully passing the testing phase and registering the patent,
we plan to apply it to various manufacturing industries. As of the date of this prospectus, we have sufficient funds to effectuate
our plans. |
|
|
● |
Solidify
our industry position by gaining additional market share. Our goal is to strengthen our market position and accelerate our
expansion by expanding our scale and gaining additional market share. We plan to increase investment in our business and expand our
production capacity through horizontal or vertical acquisitions, strategic partnerships and joint ventures. We plan to invest additional
capital in technology research and development and acquiring new equipment to increase production capacity. In addition, we plan
to participate in more expos or exhibitions domestically and internationally. With more exposure and promotion, our product and brand
will be better recognized. Currently we have no agreements or letters of intent for any acquisitions, partnerships or ventures. |
|
|
● |
Uphold
our commitment to product quality. We intend to uphold our commitment to product quality to ensure consistently high standards
throughout our operations. We intend to achieve greater traceability of our products and maintain the highest quality standards in
all of our business units. To this end, we plan to continue to maintain our quality monitoring systems across the entire operation
by strictly selecting suppliers and meeting client’s technology requirements, closely monitoring quality, keeping records of
everyday operations, and complying with national and local laws and regulations on product quality, employees, and environment sustainability.
We believe such practices largely conform with the industry’s best practices in Mainland China. |
|
|
● |
Expand
our sales and distribution network. We hope to expand our sales and distribution network to penetrate new geographic markets,
further gaining market share in existing markets and accessing a broader range of customers. We will continue to expand our sales
network, leveraging our local resources to quickly enter new markets, while also minimizing requirements for capital outlay. We plan
to focus on brand clients and concentrate on high-end industries such as industrial HMI, banking and finance, medical instruments,
military, aviation, and POS and increase our presence in both new and existing markets. |
|
|
● |
Enhance
our ability to attract, incentivize and retain talented professionals. We believe our success greatly depends on our ability
to attract, incentivize and retain talented professionals. With a view to maintaining and improving our competitive advantage in
the market, we plan to implement a series of initiatives to attract additional and retain mid- to high-level personnel, including
formulating a market-oriented employee compensation structure and implementing a standardized multi-level performance review mechanism. |
Competition
The
markets for touchscreen products are highly competitive and subject to rapid technological change. The Company believes that the principal
competitive factors in its markets are product characteristics such as touch performance, durability, optical clarity and price, as well
as supplier characteristics such as quality, service, delivery time and reputation. The Company believes that it competes favorably with
respect to these factors, although there can be no assurance that the Company will be able to continue to compete successfully in the
future.
Despite
that touchscreen products are highly competitive as a whole, we face fewer competitors, as we produce medium to large size touchscreens
which are specially tailored to certain industries, such as industrial HMI, gaming, financing, lottery, automotive, medical, and POS,
among others, and require more stable supply and longer guaranty and life span, compared with small size touchscreens, which are characterized
by shorter life cycles and guaranty but more demand in quantity.
We
believe the following companies may be our competitors:
● |
Apex
Material Technology Corp., founded in 1998, is committed to the development and innovation of resistive and projected capacitive
(PCI or PCAP) total touch solutions. With its headquarter based in Keelung, Taiwan and a subsidiary located in Milwaukee, Wisconsin,
it designs and manufactures advanced high-performance touch products for industrial and medical applications. Compared with us, although
it has a longer history and geographical advantages, it mainly focuses on resistive touch panels and recently started production
of capacitive touchscreens mostly applicable to the industrial HMI and medical industries, while our products are more widely used
in a variety of industries. |
|
|
● |
Elo
Touch Systems Inc., based and headquartered in the United States, has a history of over 40 years for the production of touchscreens.
Its product portfolio includes a broad selection of interactive touchscreen displays from 10-70 inches, all-in-one touchscreen computers,
OEM touchscreens and touchscreen controllers and touchscreen monitors. Compared with us, although it has a longer history and geographical
advantages when it comes to the competition for U.S. customers and other international customers, it recently started the production
of capacitive touchscreens mostly applicable to POS and inquiry machines, while our products are more widely used in a variety of
industries. |
|
|
● |
AbonTouch
System Inc, established in 2005, mainly focuses on manufacturing and sales of mid to large size (7”~86”) “Projective
Capacitive Sensors,” (7”~21.5”) “Five-Wire Resistive Zero-Bezel Touch Panels” and (5”~21.5”)
“Five-Wire Resistive Touch Panels.” Compared with us, although it has a longer history and geographical advantages, it
mainly focuses on resistive touch panels and recently started production of capacitive touchscreens mostly applicable to POS, inquiry
machines and industrial HMI, while our products are more widely used in a variety of industries. |
Industry
Since
inception, we have positioned ourselves in the professional touchscreen industry. Touchscreen is an input and output device and layered
on top of an electronic visual display of an information processing system, allowing individuals to access information and interact with
the device simply by touching the device’s screen with a finger or a specialized tool. Accordingly, the ease of use offered by
touchscreen-based systems makes the systems well suited both for applications for the general public and for specialized applications
for institutional users and trained computer users.
Although
touchscreen has become mainstream only over the last decade, the concept of a touch-sensitive computer display was developed as early
as 1965. Since the introduction of Apple’s iPhone in 2007, touchscreen technology has made rapid inroads into various electronics
markets, with a number of other significant companies also incorporating this technology into their products (as opposed to using a mouse,
keyboard, keypad or trackball). Viewed today as the most important tool to facilitate interaction between the individual and machine,
touchscreen technology is now an integral part of a wide range of computing products.
Employees
As
of the date of this prospectus, we have a total of 131 employees. We have no part time employees or independent contractors.
As
required by regulations in China, our Mainland China subsidiary participates in various employee social security plans that are
organized by local governments, including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical
insurance and housing insurance. Our Mainland China subsidiary is required under Chinese law to make contributions to employee
benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified
by the local government from time to time.
Our
employees are not represented by a labor organization or covered by a collective bargaining agreement. We believe that we maintain a
good working relationship with our employees and to date, we have not experienced any significant labor disputes.
Real
Properties
We
owned approximately nine separate buildings covering
a total area of approximately 735,745 square feet at No. 29, Third Main Avenue, Shigao Town, Renshou County, Meishan City, Sichuan, China
(previously known as 22 Xingan Ave., Section 2, Shigao Town, Sichuan, China) (“Property”) where we maintain our executive
offices, research and development facilities, factories and other facilities.
As
of the date of the prospectus, our Mainland China subsidiary has leased back the Property for our business operation. See “Prospectus
Summary - Recent Development” for recent changes to the Property.
We
believe that this Property is sufficient for our current business.
Legal
Proceedings
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.
From
time to time, the Company and its affiliates are parties to various legal actions arising in the ordinary course of business. Although
Sichuan Wetouch and Hong Kong Wetouch, the previous subsidiaries of the Company, and our former Chairman and director Mr. Guangde
Cai were named as defendants in several litigation matters, as of the date of this prospectus, all such matters have been settled and
Sichuan Wetouch, Hong Kong Wetouch and Mr. Guangde Cai were unconditionally and fully discharged and released therefrom. See “Certain
Relationships and Related Transactions, and Director Independence” and Note 13 to the Consolidated Financial Statements
contained in this prospectus. Accordingly, there are no pending material legal proceedings against the Company or Mr. Cai.
Corporate
History and Structure
We
were originally incorporated under the laws of the state of Nevada on August 31, 1992 as Gulf West Investment Properties, Inc, and were
dormant and had no operations for many years.
On
February 26, 2019, the Eighth Judicial District Court in and for Clark County, Nevada, Case No. A-19-787151-B, appointed Custodian Ventures
LLC, an affiliate of David Lazar, as custodian of the Company (the “Custodian”). Mr. Lazar was appointed as the sole officer
and director of the Company. On March 11, 2019, 1,714,286 shares of common stock of the Company (presented
on a pre-split basis of the 2023 Reverse Stock Split) were issued to the Custodian in consideration for the payment of cash
and the issuance of a promissory note by the Custodian to the Company. Effective as of June 11, 2019, the court discharged the Custodian’s
duties.
On
June 18, 2020, we consummated the transactions contemplated by a Stock Purchase Agreement among the Company, the Custodian, Qixun Samoa
and Qihong Samoa (Qixun Samoa and Qixun Samoa are referred to as the “Buyers”). Pursuant to the Stock Purchase Agreement,
the Buyers acquired all of the 1,714,286 shares of the Company (presented on a pre-split basis
of the 2023 Reverse Stock Split) owned by the Custodian, representing 50.47% of the issued and outstanding shares of the Company.
The Custodian and the Company agreed to indemnify the Buyers from any liabilities of the Company occurring prior to June 18, 2020, and
the promissory note issued by the Custodian to the Company was canceled. Immediately following the closing, David Lazar resigned as the
sole officer and director of the Company and Jiaying Cai was appointed as president, secretary and treasurer of the Company and as the
sole director.
Name
Change/Reverse Stock Split
Effective
September 30, 2020, we changed our name from Gulf West Investment Properties, Inc. to Wetouch Technology Inc. by filing an Amended and
Restated Articles of Incorporation with the Nevada Secretary of State to give effect to a name change. The Amended and Restated Articles
also effectuated a reverse split of our authorized, issued and outstanding shares of common stock on a 70 for 1 new basis whereby each
70 shares of outstanding common stock was exchanged for one (1) share of new common stock (the “Reverse Split” and, for avoidance
of doubt, all share amounts set forth herein shall be post Reverse Split unless otherwise specified) and, consequently, our authorized
common stock increased to 300,000,000 shares of common stock and 10,000,000 shares of preferred stock, and our then issued and outstanding
common shares decreased from 237,742,066 to 3,396,394 shares (presented on a pre-split basis
of the 2023 Reverse Stock Split), all with a par value of $0.001. All share and per share numbers relating to our common stock
prior to the effectiveness of the Reverse Split have been adjusted to give effect to the Reverse Split.
As
a result of the name change, we changed our trading symbol from “GLFW” to “WETH”, effective November 3, 2020.
Acquisition
of BVI Wetouch
On
October 9, 2020, we entered into a Share Exchange Agreement with BVI Wetouch and “BVI Shareholders, to acquire all the issued and
outstanding capital stock of BVI Wetouch in exchange for the issuance to the BVI Shareholders an aggregate of 28,000,000 shares of our
common stock (presented on a pre-split basis of the 2023 Reverse Stock Split). In
the Reverse Merger, each ordinary share of BVI Wetouch was exchanged for 560 shares 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 issued and outstanding shares of common stock (presented
on a pre-split basis of the 2023 Reverse Stock Split). As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned
subsidiary.
On
October 12, 2020, Guangde Cai was appointed as an additional director and Chairman of the Company. On October 12, 2020, Mr. Zongyi Lian
was appointed as president and chief executive officer of the Company, and Mr. Yuhua Huang was appointed as chief financial officer of
the Company. On the same day, Jiaying Cai resigned from the capacity of president and treasurer of the Company, but remains the secretary
and director of the Company.
BVI
Wetouch was established under the laws of British Virgin Islands on August 14, 2020 to acquire all the shares of Hong Kong Wetouch. On
September 11, 2020, BVI Wetouch acquired all the outstanding shares of Hong Kong Wetouch from the shareholders of Hong Kong Wetouch in
consideration of HK$10,000 pursuant to instruments of transfer in accordance with Hong Kong law. As a result of the acquisition, Hong
Kong Wetouch became a wholly-owned subsidiary of BVI Wetouch. The shareholders of Hong Kong Wetouch became the shareholders of BVI Wetouch
in said transaction, and therefore the shareholders who controlled Hong Kong Wetouch became the controlling shareholders of BVI Wetouch.
Hong
Kong Wetouch was incorporated on May 5, 2016 under the laws of Hong Kong. On July 19, 2016, Hong Kong Wetouch acquired all the shares
of Sichuan Wetouch, a Mainland China company established in Meishan, Sichuan on May 6, 2011. As a result of the acquisition, Sichuan
Wetouch became a wholly-owned subsidiary of Hong Kong Wetouch.
As
BVI Wetouch owns all the outstanding shares of Hong Kong Wetouch, which, in turn, owns all the outstanding shares of Sichuan Wetouch,
the Company owns indirectly all the business of Sichuan Wetouch. As a result of the Reverse Merger in which the Company acquired all
the outstanding shares of BVI Wetouch, Hong Kong Wetouch and Sichuan Wetouch became our indirect wholly-owned subsidiaries.
Acquisition
of HK Wetouch
Hong
Kong Wetouch Technology Limited, a limited company organized under the laws of Hong Kong (“HK Wetouch”), an affiliate of
Guangde Cai, our former 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 Vtouch Technology Co., Ltd., which was incorporated on December 30, 2020 (“Sichuan
Vtouch”) in Chengdu, Sichuan, under PRC laws.
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 Hong Kong Wetouch, which,
in turn, owns all the outstanding shares of Sichuan Wetouch and (ii) all of the outstanding shares of HK Wetouch, which owns all the
shares of Sichaun Vtouch.
Disposition
of Hong Kong Wetouch
On March 16, 2021, Sichuan Wetouch
entered into an Agreement of Compensation on Demolition (“Compensation Agreement”) with Meishan Huantian Industrial Co.,
Ltd, formerly named 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, China. 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.
In order to minimize the interruption
of our business, Sichuan Vtouch 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), which period was extended to October 31, 2022. On October 16, 2022, Sichuan Vtouch entered
an extension to the Leaseback Agreement with Sichuan Renshou to extend the period it granted
Sichuan Vtouch to lease back the Properties until October 31, 2023, then subsequently
extended to October 31, 2024, at a monthly rent of RMB400,000 (approximately $59,941).
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,
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).
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 prospectus, 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 October 31, 2024, but there is no assurance and we may need extended time to achieve our
business plan. 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 October 31, 2023 and was compensated RMB115.2 million ($17.8
million) by the local government 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.
On March 2, 2021, HK Wetouch
acquired all shares of Hong Kong Wetouch. Hong Kong Wetouch submitted its application for dissolution and was dissolved on March 18,
2022. In addition, as of March 31, 2021, Sichuan Wetouch’s business and operations have been assumed by Sichuan Vtouch.
The
following diagram illustrates our current corporate structure:
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_015.jpg)
2023 Reverse Stock Split
We filed a Certificate of Change on September
7, 2023 with the Secretary of State of the State of Nevada to effectuate a 1-for-20 reverse stock split of our outstanding common stock,
with the number of authorized shares of common stock reduced ratably (the “2023 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 Reverse Stock Split was effective as of the opening of trading on September
12, 2023 and the Company’s shares of common stock continued trading on the OTCQB marketplace under the symbol “WETHD”
for a period of 20 business days, and thereafter, the symbol will return to “WETH”.
Regulations
Overview
We
operate our business in Mainland China under a legal regime consisting of the National People’s Congress, which is the country’s
highest legislative body, the State Council, which is the highest authority of the executive branch of the PRC central government, and
several ministries and agencies under its authority, including the Ministry of Industry and Information Technology, the State Administration
for Market Regulation (“SAMR”) and their respective local offices.
This
section sets forth a summary of the most significant rules and regulations that affect our business activities in Mainland China.
Regulations
Relating to Foreign Investment in Mainland China
On
March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which came into effect on January 1, 2020
and replaced three existing laws on foreign investments in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint
Venture Law, and the Wholly Foreign-Owned Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign
Investment Law embodies an expected Mainland China regulatory trend to rationalize its foreign investment regulatory regime in
line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign- and
domestic-invested enterprises in Mainland China. The Foreign Investment Law establishes the basic framework for the access to,
and the promotion, protection, and administration of foreign investments in view of investment protection and fair competition.
Pursuant to the Foreign
Investment Law, “foreign investment” refers to investment activities directly or indirectly conducted by one or more
natural persons, business entities, or otherwise organizations of a foreign country within Mainland China, or foreign investors,
and the investment activities include the following situations: (i) a foreign investor, individually or collectively with other
investors, establishes an Foreign Investment Entity (“FIE”) in Mainland China; (ii) a foreign investor acquires
stock shares, equity shares, shares in assets, or other similar rights and interests of an enterprise within Mainland China;
(iii) a foreign investor, individually or collectively with other investors, invests in a new project in Mainland China;
and (iv) investments in other means as provided by laws, administrative regulations, or the State Council.
Investment
activities in Mainland China by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign
Investment, or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce, or the MOFCOM,
and the National Development and Reform Commission, or the NDRC. Restricted and prohibited industries are listed in the Catalogue. The
Catalogue sets out a unified basis for the special administrative measures for foreign investment access. Fields not mentioned in the
list for foreign investment access, including touchscreen manufacturing, are administered under the principle of equal treatment for
domestic and foreign capital.
Industries
not listed in the Catalogue are generally deemed as constituting a “permitted” category. According to the Catalogue, touchscreen
manufacturing is classified as industry where foreign investments are permitted.
Furthermore,
the Foreign Investment Law provides that FIEs established according to the existing laws regulating foreign investment may maintain their
structure and corporate governance within five years after the implementation of the Foreign Investment Law.
In
addition, the Foreign Investment Law also provides several protective rules and principles for foreign investors and their investments
in Mainland China, including, among others, that local governments must abide by their commitments to the foreign investors; FIEs
are allowed to issue stocks and corporate bonds; expropriation or requisition of the investment of foreign investors is prohibited except
for special circumstances, in which case statutory procedures must be followed and fair and reasonable compensation must be made in a
timely manner; mandatory technology transfer is prohibited; and the capital contributions, profits, capital gains, proceeds out of asset
disposal, licensing fees of intellectual property rights, indemnity or compensation legally obtained, or proceeds received upon settlement
by foreign investors in Mainland China may be freely remitted inward and outward in Renminbi or foreign currencies. Also, foreign
investors or FIEs should be imposed legal liabilities for failing to report investment information in accordance with the requirements.
On
December 26, 2019, the PRC State Council approved the Implementation Rules of Foreign Investment Law, which came into effect on January
1, 2020. The Implementation Rules of Foreign Investment Law restates certain principles of the Foreign Investment Law and further provides
that, among others, (i) if the legal form or the governing structure of an FIE established prior to the effective date of the Foreign
Investment Law does not comply with the compulsory provisions of the PRC Company Law or the PRC Partnership Enterprises Law, such FIE
should complete amendment registration accordingly no later than January 1, 2025; if it fails to do so, the enterprise registration authority
will not process other registration matters of the FIE and may publicize such non-compliance; and (ii) the provisions regarding transfer
of equity interests, distribution of profits and remaining assets as stipulated in the joint venture contracts of an existing FIE may
survive the Foreign Investment Law during its joint venture term.
Regulations
on Environmental Protection
Environmental
Protection Law
The
Environmental Protection Law of the PRC, or the Environmental Protection Law, was promulgated and effective on December 26, 1989,
and most recently amended on April 24, 2014, which amendments became effective January 1, 2015. This Environmental Protection Law has
been formulated for the purpose of protecting and improving both the living environment and the ecological environment, preventing and
controlling pollution, other public hazards and safeguarding people’s health.
According
to the provisions of the Environmental Protection Law, in addition to other relevant laws and regulations of the PRC, the Ministry
of Environmental Protection and its local counterparts take charge of administering and supervising said environmental protection matters.
Pursuant to the Environmental Protection Law, the environmental impact statement on any construction project must assess the pollution
that the project is likely to produce and its impact on the environment, and stipulate preventive and curative measures; the statement
shall be submitted to the competent administrative department of environmental protection for approval. Installations for the prevention
and control of pollution in construction projects must be designed, built and commissioned together with the principal part of the project.
Permission
to commence production at or utilize any construction project shall not be granted until its installations for the prevention and control
of pollution have been examined and confirmed to meet applicable standards by the appropriate administrative department of environmental
protection that examined and approved the environmental impact statement. Installations for the prevention and control of pollution shall
not be dismantled or left idle without authorization. Where it is absolutely necessary to dismantle any such installation or leave it
idle, prior approval shall be obtained from the competent local administrative department of environmental protection.
The
Environmental Protection Law makes it clear that the legal liabilities of any violation of said law include warning, fine, rectification
within a time limit, compulsory cease operation, compulsory reinstallation of dismantled installations of the prevention and control
of pollution or compulsory reinstallation of those left idle, compulsory shutout or closedown, or even criminal punishment.
Order
on Ecosystem by The Ministry of Ecology and Environment 2019 Classification-based Management on Fixed Pollutant Source
Pursuant
to the Order on Ecosystem by The Ministry of Ecology and Environment, which was issued on July 28, 2017 and most recently amended on
December 20, 2019, The Ministry of Ecology and Environment implements a classification-based management on the environmental impact assessment,
or EIA, of pollutants according to pollutant amount and the impact of the pollutants on the environment as below
● |
For
those pollutant discharge units with large amount of pollutants and significant environmental impacts, the key management on a pollutant
discharge permit is required; |
|
|
● |
For
those pollutant discharge units with small amount of pollutants and small environmental impacts, the simplified management on a pollutant
discharge permit is required; and |
|
|
● |
For
those pollutant discharge units with very small amount of pollutants and very small environmental impacts, the pollutant discharge
registration form is required. |
The
touchscreen manufacturing is classified as to fill in a Registration Form. Pursuant to a Statement on Change of Pollutant Discharge Permit
to Stationary Pollution Source Registration Form by the local government dated September 1, 2020, the environmental protection system
in Renshou County, Sichuan, was changed from permission to registration due to local administrative division change. Therefore, upon
submission of all required documentation, we are registered under the new system by filling in Stationary Pollution Source Registration
Form.
Regulations
on Consumer Rights Protection
Our
business is subject to a variety of consumer protection laws, including the PRC Consumer Rights and Interests Protection Law, which was
amended in 2013 and became effective on March 15, 2014. It imposes stringent requirements and obligations on business operators. Failure
to comply with these consumer protection laws could subject us to administrative sanctions, such as the issuance of a warning, confiscation
of illegal income, imposition of fines, an order to cease business operations, revocation of business licenses, and potential civil or
criminal liabilities.
As
of the date of this prospectus, we are not aware of any warning, investigations, prosecutions, disputes, claims or other proceedings
in respect of customer rights protection, nor have we been punished or can foresee any punishment to be made by any government authorities
of the PRC.
Regulations
on Intellectual Property Rights
Regulations
on Trademark
Trademarks
are protected by the PRC Trademark Law adopted in 1982 and subsequently amended as well as the Implementation Regulations for the Trademark
Law of the PRC in 2002 and subsequently amended in 2014 and 2019. The Trademark Office of the SAMR is responsible for the registration
and administration of trademarks and the Trademark Review and Adjudication Committee established by the SAMR is responsible for resolving
trademark disputes in Mainland China. Registered trademarks are valid for ten years from the date the registration is approved.
A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant
fails to apply in a timely manner, a grace period of six additional months may b the date of this prospectus e granted. If the registrant
fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed registrations are valid for ten
years. In April 2014, the State Council issued the revised Implementation of the Trademark Law, which specified the requirements of applying
for trademark registration and review. As of the date of this prospectus, we had 1 registered trademark in Mainland China.
Regulations
on Patent Law
According
to the PRC Patent Law, which was issued by the Standing Committee of the National People’s Congress in 1984 and last amended on
October 17, 2020, effective on June 1, 2021, and Implementation Rules of the Patent Law of the People’s Republic of China, which
were promulgated by the State Council in 2001 and last amended on January 9, 2010. Draft amendments to the Implementation Rules of the
Patent Law are currently under review. The Patent Law and its implementation rules provide for three types of patents: “invention,”
“utility model” and “design.” “Invention” refers to any new technical solution relating to a product,
a process or improvement thereof; “utility model” refers to any new technical solution relating to the shape, structure,
or their combination, of a product, which is suitable for practical use; and “design” refers to any new design of the whole
or partial shape, pattern, color or the combination of any two of them, of a product, that creates an aesthetical feeling and is suitable
for industrial application. Invention patents are valid for 20 years, while design patents and utility model patents are valid for 15
years and 10 years, respectively, each calculated from the date of application. To be patentable, invention or utility models must meet
three criteria: novelty, inventiveness and practicability. Except under certain specific circumstances provided by law, any third-party
user must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the use constitutes an infringement
of the patent rights. As of the date of this prospectus, we had 8 registered patents under our former Mainland China subsidiary
Sichuan Wetouch, which we are in the process of assigning to our Mainland China subsidiary Sichuan Vtouch and 4 pending patents
in Mainland China under our Mainland China subsidiary Sichuan Vtouch.
Regulations
on Foreign Exchange
General
Administration of Foreign Exchange
Under
the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and most recently amended on August 5, 2008 and various
regulations issued by the SAFE, and other relevant PRC government authorities, Renminbi is convertible into other currencies for current
account items, such as trade-related receipts and payments and payment of interest and dividends. The conversion of Renminbi into other
currencies and remittance of the converted foreign currency outside Mainland China for capital account items, such as direct equity
investments, loans, and repatriation of investment, requires the prior approval from the SAFE or its local office.
Payments
for transactions that take place in Mainland China must be made in Renminbi. Unless otherwise approved, Mainland China
companies may not repatriate foreign currency payments received from abroad or retain the same abroad. FIEs may retain foreign exchange
in accounts with designated foreign exchange banks under the current account items subject to a cap set by the SAFE or its local branch.
Foreign exchange proceeds under the current accounts may be either retained or sold to a financial institution engaged in settlement
and sale of foreign exchange pursuant to relevant SAFE rules and regulations. For foreign exchange proceeds under the capital accounts,
approval from the SAFE is generally required for the retention or sale of such proceeds to a financial institution engaged in settlement
and sale of foreign exchange.
Pursuant
to the Circular of the SAFE on Notice of State Administration of Foreign Exchange on Further Improvements and Adjustments to Foreign
Exchange Control Policies for Direct Investment, which was promulgated on November 19, 2012, became effective on December 17, 2012, and
was further amended on May 4, 2015, October 10, 2018, and December 30, 2019, approval of the SAFE is not required for opening a foreign
exchange account and depositing foreign exchange into the accounts relating to the direct investments. This circular also simplifies
foreign exchange-related registration required for foreign investors to acquire equity interests of PRC companies and further improve
the administration on foreign exchange settlement for FIEs.
The
Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving the Foreign Exchange Management Policies
for Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015 and was amended on December 30, 2019, cancels the
administrative approvals of foreign exchange registration of direct domestic investment and direct overseas investment and simplifies
the procedure of foreign exchange-related registration. Pursuant to SAFE Circular 13, investors should register with banks for direct
domestic investment and direct overseas investment.
The
Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested
Enterprises, which was promulgated on March 30, 2015, became effective on June 1, 2015, and was amended on December 30, 2019, provides
that an FIE may, according to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital
account for which the relevant foreign exchange administration has confirmed monetary capital contribution rights and interests (or for
which the bank has registered the injection of the monetary capital contribution into the account). Pursuant to this circular, for the
time being, FIEs are allowed to settle 100% of their foreign exchange capital on a discretionary basis; an FIE should truthfully use
its capital for its own operational purposes within the scope of its business; where an ordinary FIE makes domestic equity investment
with the amount of foreign exchanges settled, the FIE must first go through domestic re-investment registration and open a corresponding
account for foreign exchange settlement pending payment with the foreign exchange administration or the bank at the place where it is
registered.
The
Notice of the State Administration of Foreign Exchange on Policies for Reforming and Regulating the Control over Foreign Exchange Settlement
under the Capital Account, which was promulgated and became effective on June 9, 2016, provides that enterprises registered in Mainland
China may also convert their foreign debts from foreign currency into Renminbi on a self-discretionary basis. This circular also
provides an integrated standard for conversion of foreign exchange under capital account items (including, but not limited to, foreign
currency capital and foreign debts) on a self-discretionary basis, which applies to all enterprises registered in Mainland China.
On
January 26, 2017, SAFE promulgated the Notice of State Administration of Foreign Exchange on Improving the Check of Authenticity and
Compliance to further Promote Foreign Exchange Control, which stipulates several capital control measures with respect to the outbound
remittance of profit from domestic entities to offshore entities, including: (i) banks should check board resolutions regarding profit
distribution, the original version of tax filing records, and audited financial statements pursuant to the principle of genuine transactions;
and (ii) domestic entities should hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant
to this circular, domestic entities should make detailed explanations of the sources of capital and utilization arrangements, and provide
board resolutions, contracts, and other proof when completing the registration procedures in connection with an outbound investment.
On
October 25, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Facilitation
of Cross-border Trade and Investment, which, among other things, allows all FIEs to use Renminbi converted from foreign currency-denominated
capital for equity investments in Mainland China, as long as the equity investment is genuine, does not violate applicable laws,
and complies with the negative list on foreign investment. However, since this circular is newly promulgated, it is unclear how the SAFE
and competent banks will carry it out in practice.
According
to the Regulations of the PRC on Administration of Company Registration, which were promulgated by the State Council on June 24, 1994,
became effective on July 1, 1994, and were amended on February 6, 2016, and other laws and regulations governing FIEs and company registrations,
the establishment of an FIE and any capital increase and other major changes in an FIE should be registered with the State Administration
for Market Regulation or its local counterparts and filed via the enterprise registration system.
Pursuant
to SAFE Circular 13 and other laws and regulations relating to foreign exchange, when setting up a new FIE, the enterprise should register
with the bank located at its registered place after obtaining the business license, and if there is any change in capital or other changes
relating to the basic information of the FIE, including, without limitation, any increase in its registered capital or total investment,
the FIE must register such changes with the bank located at its registered place after obtaining approval from or completing the filing
with relevant authorities. Pursuant to the relevant foreign exchange laws and regulations, such foreign exchange registration with the
banks will typically take less than four weeks upon the acceptance of the registration application.
Based
on the foregoing, if we intend to provide funding to our wholly foreign-owned subsidiaries through capital injection at or after their
establishment, we must register the establishment of and any follow-on capital increase in our wholly foreign-owned subsidiaries with
the State Administration for Market Regulation or its local counterparts, file such via the enterprise registration system, and register
such with the local banks for the foreign exchange related matters.
Regulations
on Offshore Financing
Under the Circular of the SAFE
on Issues Concerning the Foreign Exchange Administration over the Overseas Investment and Financing and Round-Trip Investment by Domestic
Residents via Special Purpose Vehicles, or SAFE Circular 37, effective on July 4, 2014, Mainland China residents are required
to register with the local SAFE branch prior to the establishment or control of an offshore special purpose vehicle, which is defined
as an offshore enterprise directly established or indirectly controlled by Mainland China residents for investment and financing
purposes, with the enterprise assets or interests Mainland China residents hold in Mainland China or overseas. The term
“control” means to obtain the operation rights, right to proceeds, or decision-making power of a special purpose vehicle
through acquisition, trust, holding shares on behalf of others, voting rights, repurchase, convertible bonds, or other means. At the
same time, the SAFE has issued the Operation Guidance for the Issues Concerning Foreign Exchange Administration over Round-Trip Investment
regarding the procedures for SAFE registration under SAFE Circular 37, which became effective on July 4, 2014 as an attachment of SAFE
Circular 37.
The Mainland China residents
are also required to amend the registration or filing with the local SAFE branch any material change in the offshore company, such as
any change of basic information (including change of such Mainland China residents, name and operation term), increase or decreases
in investment amount, transfers or exchanges of shares, or merger or divisions. On February 28, 2015, SAFE promulgated the Notice on
Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective
on June 1, 2015. Pursuant to SAFE Notice 13, instead of applying for approvals regarding foreign exchange registrations of foreign direct
investment and overseas direct investment from SAFE as required under current laws, entities and individuals will be required to apply
for such foreign exchange registrations, including those required under the SAFE Circular 37, from qualified banks. The qualified banks,
under the supervision of SAFE, will directly examine the applications and conduct the registration.
Failure to comply with the registration
procedures set forth in the SAFE Circular 37, or making misrepresentation on or failure to disclose controllers of foreign-invested enterprise
that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the
relevant onshore company, including the increase of its registered capital, the payment of dividends and other distributions to its offshore
parent or affiliate and the capital inflow from the offshore entities, and may also subject relevant Mainland China residents
to penalties under Mainland China foreign exchange administration regulations. Mainland China residents who directly or
indirectly hold any shares in our company from time to time are required to register with SAFE in connection with their investments in
us. We have requested Mainland China residents holding direct or indirect interest in our company to our knowledge to make the
necessary applications, filings and amendments as required under the SAFE Circular 37 and other related rules.
As of the date of this prospectus,
the Mainland China residents have either not completed, or have not applied for, foreign exchange registration under the SAFE
Circular 37 and other related rules. Although they are either in the process of making foreign exchange registration or plan to make
foreign exchange registrations, they may still be faced with the above possible fines in accordance with the PRC Laws.
Regulations on Dividend Distribution
The principal laws and regulations
regulating the distribution of dividends by FIEs in Mainland China include the PRC Company Law, as amended in 2004, 2005, 2013,
and 2018, and the 2019 PRC Foreign Investment Law and its Implementation Rules. Under the current regulatory regime in Mainland China,
FIEs in Mainland China may pay dividends only out of their retained earnings, if any, determined in accordance with Mainland
China accounting standards and regulations. A Mainland China company is required to set aside as statutory reserve funds at
least 10% of its after-tax profit, until the cumulative amount of such reserve funds reaches 50% of its registered capital unless laws
regarding foreign investment provide otherwise. A Mainland China company cannot distribute any profits until any losses from prior
fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the
current fiscal year.
We currently intend to retain
most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do
not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our common stock as
a source for any future dividend income.
Regulation on M&A Rules
In August 2006, six PRC governmental
agencies jointly promulgated the Provisions on Foreign-funded Mergers and Acquisitions of Domestic Enterprises, or the M&A Rule,
as most recently amended in 2009. The M&A Rule requires offshore special purpose vehicles formed to pursue overseas listing of equity
interests in Mainland China companies and controlled directly or indirectly by Mainland China companies or individuals
to obtain the approval of the China Securities Regulatory Commission (“CSRC”) prior to the listing and trading of such special
purpose vehicle’s securities on any stock exchange overseas.
The
M&A Rule further requires that the Ministry of Commerce, or MOFCOM, be notified in advance of any change-of-control transaction in
which a foreign investor acquires control of a Mainland China domestic enterprise or a foreign company with substantial Mainland
China operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings,
issued by the State Council, are triggered. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the NPC requires
that transactions which are deemed concentrations and involve parties with specified turnover thresholds be cleared by the MOFCOM before
they can be completed.
On December 24,
2021, the CSRC issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic
Companies (Draft for Comments), or the Draft Overseas Listing Administration Provisions, and the Administrative Measures for the Filing
of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), or the Draft Overseas Listing Filing Measures,
which are open for public comments until January 23, 2022.
Regulations
on Taxation
Enterprise
Income Tax
On March 16, 2007, the National
People’s Congress promulgated the PRC Enterprise Income Tax Law, which was amended on February 24, 2017 and December 29, 2018.
On December 6, 2007, the State Council enacted the Regulations for the Implementation of the Enterprise Income Tax Law, which became
effective on January 1, 2008 and amended on April 23, 2019. Under the Enterprise Income Tax Law and the relevant implementation regulations,
both resident enterprises and non-resident enterprises are subject to tax in Mainland China. Resident enterprises are defined
as enterprises that are established in Mainland China in accordance with PRC laws, or that are established in accordance with
the laws of foreign countries but are actually or in effect controlled from within Mainland China. Non-resident enterprises are defined
as enterprises that are organized under the laws of foreign countries and whose actual management is conducted outside Mainland China,
but have established institutions or premises in Mainland China, or have no such established institutions or premises but have income
generated from inside Mainland China. Under the Enterprise Income Tax Law and relevant implementing regulations, a uniform corporate
income tax rate of 25% is applied. However, if non-resident enterprises have not formed permanent establishments or premises in Mainland
China, or if they have formed permanent establishment or premises in Mainland China but there is no actual relationship between
the relevant income derived in Mainland China and the established institutions or premises set up by them, enterprise income tax
is set at the rate of 10% with respect to their income sourced from inside Mainland China.
Value-Added
Tax
The
PRC Provisional Regulations on Value-Added Tax were promulgated by the State Council on December 13, 1993, which became effective on
January 1, 1994 and were subsequently amended from time to time. The Detailed Rules for the Implementation of the PRC Provisional Regulations
on Value-Added Tax (2011 Revision) was promulgated by the Ministry of Finance on December 25, 1993 and subsequently amended on December
15, 2008 and October 28, 2011. On November 19, 2017, the State Council promulgated the Decisions on Abolishing the PRC Provisional Regulations
on Business Tax and Amending the PRC Provisional Regulations on Value-Added Tax. Pursuant to these regulations, rules and decisions,
all enterprises and individuals engaged in sale of goods, provision of processing, repair, and replacement services, sales of services,
intangible assets, real property, and the importation of goods within Mainland China territory are VAT taxpayers. On March 21,
2019, the Ministry of Finance, the SAT, and the General Administration of Customs jointly issued the Announcement on Relevant Policies
on Deepen the Reform of Value-Added Tax. Sales revenue represents the invoiced value of goods, net of VAT. The VAT is based on gross
sales price and VAT rates range up to 17%, starting from May 1, 2018, VAT rate was lowered to 16%, and starting from April 1, 2019, VAT
rate was further lowered to 13%.
Dividend
Withholding Tax
The Enterprise Income Tax Law
provides that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared to non-Mainland China
resident investors that do not have an establishment or place of business in Mainland China, or that have such establishment
or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent
such dividends are derived from sources within Mainland China.
Pursuant to the Arrangement Between
the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital, and other applicable PRC laws, if a Hong Kong resident enterprise is determined
by the competent Mainland China tax authority to have met the relevant conditions and requirements under this arrangement and
other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a Mainland China
resident enterprise may be reduced to 5%. However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend
Provisions in Tax Treaties issued on February 20, 2009, if the relevant Mainland China tax authorities determine, in their discretions,
that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such Mainland
China tax authorities may adjust the preferential tax treatment. Pursuant to the Circular on Several Questions regarding the “Beneficial
Owner” in Tax Treaties, which was issued on February 3, 2018 by the SAT and became effective on April 1, 2018, when determining
the applicant’s status as the “beneficial owner” regarding tax treatments in connection with dividends, interests,
or royalties in the tax treaties, several factors, including, without limitation, whether the applicant is obligated to pay more than
50% of his or her income in twelve months to residents in third country or region, whether the business operated by the applicant constitutes
the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant any
tax exemption on relevant incomes or levy tax at an extremely low rate, will be taken into account, and such factors will be analyzed
according to the actual circumstances of the specific cases. This circular further provides that an applicant who intends to prove his
or her status as the “beneficial owner” must submit the relevant documents to the relevant tax bureau pursuant to the Announcement
on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements.
Regulations
on Employment Laws
In
accordance with the PRC National Labor Law, which became effective in January 1995 and amended from time to time, and the PRC Labor Contract
Law, which became effective in January 2008, as amended subsequently, employers must execute written labor contracts with full-time employees
in order to establish an employment relationship. All employers must compensate their employees equal to at least the local minimum wage
standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards
and provide employees with appropriate workplace safety training. In addition, employers in Mainland China are obliged to pay
contributions to the social insurance plan and the housing fund plan for employees.
Recent Regulatory Developments
On
July 6, 2021, the relevant PRC government authorities published the Opinions on Strictly Cracking Down Illegal Securities Activities
in Accordance with the Law. These opinions call for strengthened regulation over illegal securities activities and supervision on overseas
listings by Mainland China-based companies and propose to take effective measures, such as promoting the construction of relevant
regulatory systems to deal with the risks and incidents faced by Mainland China-based overseas-listed companies. On December 24,
2021, the CSRC released the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities
by Domestic Enterprises (Draft for Comments) (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance
of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”, together
with the Draft Administrative Provisions, the “Draft Rules”). The Draft Rules lay out the filing regulations for both direct
and indirect overseas listings and clarify the determination criteria for indirect overseas listings in overseas markets. Among other
requirements, if a domestic enterprise intends to indirectly offer and list securities in an overseas market, the record-filing obligation
shall be completed within three business days after the overseas listing application is submitted.
On
February 17, 2023, with the approval of the State Council, the CSRC released the Trial Administrative Measures of Overseas Securities
Offering and Listing by Domestic Companies, or the Trial Administrative Measures, and five supporting guidelines, which came into effect
on March 31, 2023. According to the Trial Administrative Measures, (1) domestic companies that seek to offer or list securities overseas,
both directly and indirectly, should fulfill the filing procedure and report relevant information to the CSRC; (2) if the issuer meets
both of the following conditions, the overseas offering and listing shall be determined as an indirect overseas offering and listing
by a domestic company: (i) any of the total assets, net assets, revenues or profits of the domestic operating entities of the issuer
in the most recent accounting year accounts for more than 50% of the corresponding figure in the issuer’s audited consolidated
financial statements for the same period; (ii) its major operational activities are carried out in Mainland China or its main places
of business are located in Mainland China, or the senior managers in charge of operation and management of the issuer are mostly Chinese
citizens or are domiciled in Mainland China; and (3) where a domestic company seeks to indirectly offer and list securities in an overseas
market, the issuer shall designate a major domestic operating entity responsible for all filing procedures with the CSRC, and where an
issuer makes an application for initial public offering and listing in an overseas market, the issuer shall submit filings with the CSRC
within three business days after such application is submitted. Our PRC counsel has advised that because our common stock currently trades
in the U.S., we are not required to submit filings to the CSRC before this offering is completed and this offering is not conditioned
on CSRC approval. Rather, within three days of the closing of this offering, we must submit filings to the CSRC in accordance with the
Trial Administrative Measures. However, given that the Trial Administrative Measures were recently promulgated, there remain substantial
uncertainties as to their interpretation, application, and enforcement and there is no guarantee that the relevant PRC government agencies,
including the CSRC, would reach the same conclusion that we and our PRC counsel have reached. In addition, if we were to fail to comply
with the post-offering filing obligations imposed by the Trial Administrative Measures or make a misrepresentation, misleading statement
or material omission in the materials we submit to the CSRC, the CSRC would have the right to order rectification, issue a warning
and impose a fine on us of between RMB 1 million and RMB 10 million and issuing a warning to the parties responsible for
such failure, misrepresentation or material omission and impose a fine on each of such individuals ranging from RMB 500,000 to RMB 5
million. See “Risk Factors — Risks Related to Doing Business in China.”
On the same day, the CSRC
held a press conference for the release of the Trial Administrative Measures and issued the Notice on Administration for the Filing of
Overseas Offering and Listing by Domestic Companies, which, among others, clarifies that (1) a six-month transition period will be granted
to domestic companies which, prior to the effective date of the Trial Administrative Measures, have already obtained the approval from
overseas regulatory authorities or stock exchanges, such as completion of registration in the market of the United States, but have not
completed the indirect overseas listing; and (2) domestic companies that have already submitted valid applications for overseas offering
and listing but have not obtained approval from overseas regulatory authorities or stock exchanges on or prior to the effective date
of the Trial Administrative Measures, may reasonably arrange the timing for submitting their filing applications with the CSRC, and shall
complete the filing before the completion of their overseas offering and listing.
In addition, on July 10, 2021,
the Cyberspace Administration of China issued the Measures for Cybersecurity Review (Revision Draft for Comments) for public comments,
which propose to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or
may affect national security, including listings in foreign countries by companies that possess the personal data of more than one million
users. On December 28, 2021, the Measures for Cybersecurity Review (2021 version) were promulgated and became effective on February 15,
2022 (the “Measures”), which iterates that any “online platform operators” controlling personal information of
more than one million users that seeks to list on a foreign stock exchange shall also be subject to cybersecurity review. As we are neither
an “operator of critical information infrastructure” nor a “data processor” carrying out data processing activities
that affect or may affect national security, we believe that the Measures are not applicable to us even after they take effect in current
form. The PRC government is increasingly focused on data security, recently launching cybersecurity review against a number of mobile
apps operated by several US-listed Chinese companies and prohibiting these apps from registering new users during the review period. There
are great uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations regarding data and privacy security.
We may be required to change our data and other business practices and be subject to regulatory investigations, penalties, and increased
cost of operations as a result of these laws and policies.
MANAGEMENT
Directors,
Executive Officers and Corporate Governance
The
following table sets forth information regarding our current directors and executive officers:
Name |
|
Age |
|
Position |
Fei
Bai |
|
47 |
|
Chairman,
Director |
Zongyi
Lian |
|
58 |
|
President
and Chief Executive Officer |
Yuhua
Huang |
|
48 |
|
Chief
Financial Officer |
Jiaying
Cai |
|
27 |
|
Secretary,
Director |
Jing
Chen |
|
57 |
|
Director |
Xiaojin
Tang |
|
48 |
|
Director |
Congjin
Wang |
|
32 |
|
Director |
Fei Bai - Chairman and
Director
Mr. Bai has been our Company’s
Chairman and Director since August 31, 2022. Mr Bai has served as the general manager of the Nanjing Branch of Shenzhen Jushenghua Co.
Ltd. since July 2019, and is mainly responsible for private fundraising and sales funding of trust products. Mr. Bai served as general
manager of the business division of Heyi Asset from September 2015 to June 2019. Mr. Bai received his bachelor’s degree in law
from Nanjing Normal University in June 2006 and holds a securities/fund qualification issued by the Securities Association of China since
August 2015.
Zongyi
Lian - Chief Executive Officer and President
Mr.
Lian was appointed Chief Executive Officer and President on October 12, 2020. He has served as Chief Executive Officer of Sichuan
Wetouch since November 21, 2017. In 2006, he co-founded Chongqing Damai Touchscreen Computer Co., Ltd (“Damai”) (later renamed
Chengdu Wetouch) and served as Vice Technique General Manager. In 2011, he co-founded Sichuan Wetouch and served as Vice Technique General
Manager. Mr. Lian holds a Master’s degree in Automatic Control from National Chiao Tung University.
Yuhua
Huang - Chief Financial Officer
Mr.
Huang was appointed our Chief Financial Officer on October 12, 2020. He concurrently serves as Chief Financial Officer of Sichuan
Wetouch, a position he has held since March 2018. From 2010 to 2013, he worked as an accountant at Liugong Group and, from 2014 to 2017,
he served as Financial Manager at Shanghai Oriental Pearl Group Co., Ltd. Mr. Huang holds a Bachelor’s degree in accounting from
Sichuan Institute of Industrial Technology. He was qualified as a CPA in China in 2004 and as an auditor in 2014, respectively.
Jiaying
Cai - Secretary and Director
Ms.
Cai has been our Company’s Secretary and Director since June 2020. She concurrently serves as the Chief Executive Officer
and director of BVI Wetouch, our wholly-owned subsidiary, since its inception on August 14, 2020. From February 2017 to May 2019, Ms.
Cai worked at Chengdu Wetouch Technology Co., Ltd, an affiliate of Guangde Cai, which specializes in the research, development, manufacturing
and sales of capacitive touchscreens widely used in HMI and military industries, where she served as staff within the financial department,
human resources department and purchasing department. In April 2020, she joined Chengdu Haobot Technology Co., Ltd and has been serving
as its Legal Representative and General Manager until present. Ms. Cai holds a Bachelor’s degree in Music from The Sichuan Conservatory
of Music and an EMBA degree from Sichuan University. Mr. Cai’s role at Chengu Wetouch led to the conclusion that she should serve
as a director.
Jing Chen - Director
Ms.
Chen was appointed to our Company’s Board of Directors, effective November 12, 2021. She serves as the Group Vice President of
Future Fintech Group Inc. (Nasdaq: FTFT). From May 2019 to November 2020, Ms. Chen served as the CFO of Future Fintech Group Inc. She
served as the CFO of AnZhiXinCheng (Beijing) Technology Co., Ltd. from August 2018 to May 2019. Ms. Chen is an Independent Director of
Hello iPayNow (Beijing) Company Ltd. since April 2019. From August 2017 to July 2018, she served as CFO of Beijing Logis Technology Development
Co., Ltd., a company listed on The National Equities Exchange and Quotations Co., Ltd. of China, which is a Chinese over-the-counter
stock trading system. From June 2016 to July 2017, Ms. Chen served as Group Chief Financial Officer of Beijing AnWuYou Food Co., Ltd.
Ms. Chen served as Chief Financial Officer of Beijing DKI Investment Management Co., Ltd. from August 2012 to May 2016. Ms. Chen received
a Doctorate of Business Administration from Victoria University, Neuchatel, Switzerland and an MBA degree from City University of Seattle
in Washington, U.S. Ms. Chen holds Fellow Membership of CPA Australia (FCPA), Fellow Membership of the Association of International Accountants
U.K. (FAIA) and is a Member of the Chartered Institute of Management Accountants (CIMA). She is also a Senior Member of the International
Financial Management (SIFM) accredited by the Ministry of Human Resources and Social Security of the PRC. The Board believes Ms.
Chen’s extensive public company and accounting experience makes her a valuable addition to the board.
Xiaojin Tang - Director
Mr.
Tang was elected to our Company’s Board of Directors, effective August 31, 2022. He has served as an attorney at Gaopeng &
Partners since 2019. From April 2017 to December 2017, he served as the deputy director of Nanjing Immigration Inspection. Mr. Tang received
his bachelor’s degree in corporate law from Hohai University. He received his master’s degree in sociology from Jiangsu Provincial
Party School. The Board believes Mr. Tang’s extensive knowledge and background in the legal field will make him a valuable addition
to the Board.
Congjin Wang - Director
Mr.
Wang was elected to our Company’s Board of Directors, effective February 17, 2023. Mr. Wang has served as an attorney at Gaopeng
(Nanjing) Law Firm since June 2022. From June 2021 through May 2022, Mr. Wang worked for Guohao Law Firm. He worked at Beijing Gaopeng
(Nanjing) Law Firm from December 2014 through May 2021. He is currently a member of Nanjing Securities and Futures Fund Professional
Committee, a public interest lawyer of China Securities Small and Medium Investors Service Center, a member of Jiangsu foreign lawyers
Talent Pool, and a member of the Nanjing Foreign Lawyers Talent Pool. Mr. Wang received a bachelor’s degree from Anqing Normal
University in July 2014, and he is currently studying at University of Chinese Academy of Social Sciences for his master’s degree. The
Board believes Mr. Wang’s extensive knowledge and background in the legal field will make him a valuable addition to the Board.
Committees
We
have established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate
governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described
below.
Audit
Committee. Our audit committee consists of Jing Chen, Xiaojin Tang and Congjin Wang. Ms. Chen is the chairperson of the audit
committee. We have determined that Ms. Chen, Mr. Tang and Mr. Wang each satisfy the “independence” requirements of Nasdaq
Listing Rule 5605(a)(2) and meets the independence standards under Rule 10A-3 under the Exchange Act. We have determined that Ms. Chen
qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes
and the audits of the financial statements of our company. The audit committee is responsible for, among other things: (a) representing
and assisting the Board in its oversight responsibilities regarding the Company’s accounting and financial reporting processes,
the audits of the Company’s financial statements, including the integrity of the financial statements, and the independent auditors’
qualifications and independence; (b) overseeing the preparation of the report required by SEC rules for inclusion in the Company’s
annual proxy statement; (c) retaining and terminating the Company’s independent auditors; (d) approving in advance all audit and
permissible non-audit services to be performed by the independent auditors; and (e) approving related person transactions.
Compensation
Committee. Our compensation committee consists of Jing Chen, Xiaojin Tang and Congjin Wang. Mr. Tang is the chairperson of our
compensation committee. We have determined that Ms. Chen, Mr. Tang and Mr. Wang each are “independent,” as such term is defined
for directors and compensation committee members in the listing standards of the NASDAQ Stock Market LLC. Additionally, each qualify
as “non-employee directors” for purposes of Rule 16b-3 under the Securities Exchange Act of 1934 and as “outside directors”
for purposes of Section 162(m) of the Internal Revenue Code. The Committee has been established to: (a) assist the Board in seeing that
a proper system of long-term and short-term compensation is in place to provide performance oriented incentives to attract and retain
management, and that compensation plans are appropriate and competitive and properly reflect the objectives and performance of management
and the Company; (b) assist the Board in discharging its responsibilities relating to compensation of the Company’s executive officers;
(c) evaluate the Company’s Chief Executive Officer and set his or her remuneration package; and (d) make recommendations to the
Board with respect to incentive compensation plans and equity-based plans.
Nominating
and Corporate Governance Committee. Our nominating and corporate governance committee consists of Jing Chen, Xiaojin Tang and
Congjin Wang. Mr. Wang is the chairperson of our nominating and corporate governance committee. We have determined that each of Ms. Chen,
Mr. Tang and Mr. Wang qualify as “independent” as that term is defined by Nasdaq Listing Rule 5605(a)(2). The Committee is
responsible for: (a) assisting the Board in determining the desired experience, mix of skills and other qualities to provide for appropriate
Board composition, taking into account the current Board members and the specific needs of the Company and the Board; (b) identifying
qualified individuals meeting those criteria to serve on the Board; (c) proposing to the Board the Company’s slate of director
nominees for election by the shareholders at the Annual Meeting of Shareholders and nominees to fill vacancies and newly created directorships;
(d) reviewing candidates recommended by shareholders for election to the Board and shareholder proposals submitted for inclusion in the
Company’s proxy materials; (e) advising the Board regarding the size and composition of the Board and its committees; (f) proposing
to the Board directors to serve as chairpersons and members on committees of the Board; (g) coordinating matters among committees of
the Board; (h) proposing to the Board the slate of corporate officers of the Company and reviewing the succession plans for the executive
officers; (i) recommending to the Board and monitoring matters with respect to governance of the Company; and (j) overseeing the Company’s
compliance program.
Term
of Office
Our
directors hold office until the next annual meeting of shareholders of the Company and until their successors have been elected and qualified.
Our officers are elected by the board of directors and serve at the discretion of the board of directors.
Family
Relationships
There are no other
family relationships between any of our directors or executive officers. There are no arrangements or understandings between our directors
and directors and any other person pursuant to which they were appointed as an officer and director of the Company.
Code
of Ethics
We have adopted a written code
of ethics and business conduct that applies to our directors, officers and employees, including our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code of ethics
and business conduct will be provided to any person, without charge, upon written request sent to Wetouch Technology Inc., No. 29, Third
Main Avenue, Shigao Town, Renshou County, Meishan, Sichuan, China; Attention: Corporate Secretary. Any amendments to or waivers of the
code of ethics and business conduct will be promptly reported in a Current Report on Form 8-K, as required by applicable laws.
Involvement
in Certain Legal Proceedings
During
the past ten years no current director, executive officer, promoter or control person of the Company has been involved in the following:
(1)
A petition under the Federal bankruptcy laws or any state insolvency law which was filed by or against, or a receiver, fiscal agent or
similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner
at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer
at or within two years before the time of such filing;
(2)
Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations
and other minor offenses);
(3)
Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
i.
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing,
or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment
company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection
with such activity;
ii.
Engaging in any type of business practice; or
iii.
Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of
Federal or State securities laws or Federal commodities laws;
(4)
Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State
authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described
in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;
(5)
Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State
securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or
vacated;
(6)
Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated
any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended or vacated;
(7)
Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated, relating to an alleged violation of:
i.
Any Federal or State securities or commodities law or regulation; or
ii.
Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent
injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or
prohibition order; or
iii.
Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(8)
Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section
1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a member.
Shareholder
Communications to the Board
Shareholders
who are interested in communicating directly with members of the Board, or the Board as a group, may do so by writing directly to the
individual Board member c/o Secretary, Wetouch Technology Inc., No. 29, Third Main Avenue, Shigao Town, Renshou County, Meishan, Sichuan,
China. The Company’s Secretary will forward communications directly to the appropriate Board member. If the correspondence is not
addressed to the particular member, the communication will be forwarded to a Board member to bring to the attention of the Board. The
Company’s Secretary will review all communications before forwarding them to the appropriate Board member.
Compensation
of Directors
The table
below shows the compensation paid to our non-employee directors during 2023 and 2022.
Name | |
Year | | |
Fees
Earned or Paid in Cash | | |
Stock
Awards | | |
Option
Awards | | |
Non-Equity
Incentive Plan Compensation | | |
Nonqualified
Deferred Compensation Earnings | | |
All
other
Compensation | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Fei
Bai | |
2023 | | |
0 | | |
— | | |
— | | |
— | | |
— | | |
— | | |
0 | |
| |
2022 | | |
0 | | |
— | | |
— | | |
— | | |
— | | |
— | | |
0 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Xiaojin
Tang | |
2023 | | |
0 | | |
— | | |
— | | |
— | | |
— | | |
— | | |
0 | |
| |
2022 | | |
0 | | |
— | | |
— | | |
— | | |
— | | |
— | | |
0 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Congjin Wang | |
| 2023 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
| |
| 2022 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Jiaying
Cai | |
| 2023 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
| |
| 2022 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Jing
Chen | |
| 2023 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
| |
| 2022 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Guangde Cai | |
| 2022 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
| |
| 2021 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Jeffrey
Kone | |
| 2023 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
| |
| 2022 | | |
| 0 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0 | |
Ms. Jiaying
Cai became a director of the Company on June 18, 2020 and Mr. Guangde Cai became a director of the Company on October 12, 2020. Mr. Guangde Cai resigned as a director on August 31, 2022 and Mr. Jeffrey Kone resigned
as a director on February 16, 2023. Ms. Xiaojin Tang became a director of the Company and Mr. Fei Bai became a director and chairman of the board of
the directors of the Company on August 31, 2022.
For
the year ended December 31, 2023, no compensation has been paid to our directors in consideration for their services rendered
in their capacities as directors.
Outstanding
Equity Awards at Fiscal Year-End
There
are no current outstanding equity awards to our executive officers as of December 31, 2023.
Long-Term
Incentive Plans
There
are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers.
EXECUTIVE
COMPENSATION
The
following table sets forth total compensation paid to our named executive officer for the years ended December 31, 2023 and 2022.
Name and principal position | |
Year | | |
Salary ($) | | |
Bonus ($) | | |
Stock
awards ($) | | |
Option
awards ($) | | |
All
other compensation ($) | | |
Total
($) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Zongyi Lian, President, Chief Executive Officer | |
| 2023 | | |
$ | 40,960 | | |
| | | |
| | | |
| | | |
$ | 15,932 | | |
$ | 56,892 | |
| |
| 2022 | | |
$ | 40,960 | | |
| — | | |
| — | | |
| — | | |
$ | 15,932 | | |
$ | 56,892 | |
Employment
Agreements with Key Executives of Sichuan Wetouch
On
November 21, 2017, Sichuan Wetouch entered into an employment agreement with its Chief Executive Officer, Zongyi Lian, pursuant to which
he receives an annual base salary of approximately $23,890 (equivalent to RMB168,000) plus other annual remuneration, including but not
limited to position salary of approximately $17,070 (equivalent to RMB120,000), confidentiality fee of approximately $6,828 (equivalent
to RMB48,000) and subsidies of approximately $9,104 (equivalent to RMB64,000). Mr. Lian’s employment is for an initial term of
three (3) years and may be renewed by the parties within 30 days prior to the expiration of the employment agreement. On November 13,
2020, the employment agreement with Mr. Lian was renewed for another three (3) years until November 20, 2023, with the similar terms
and conditions. On November 20, 2023, the employment agreement with Mr. Lian was renewed for another three (3) years until November
20, 2026, with similar terms and conditions. Amount reflects salary paid to Mr. Lian for services rendered to our former operating
subsidiary, Sichuan Wetouch. Such employment agreement has been assigned to our Mainland China subsidiary, Sichuan Vtouch.
On
November 1, 2017, Sichuan Wetouch entered into an employment agreement with its Chief Financial Officer, Yuhua Huang, pursuant to which
he receives an annual base salary of approximately $11,945 (equivalent to RMB84,000) plus other annual remuneration, including but not
limited to position salary of approximately $8,535 (equivalent to RMB60,000), confidentiality fee of approximately $3,414 (equivalent
to RMB24,000) and subsidies of approximately $4,552 (equivalent to RMB32,000). Mr. Huang’s employment is for an initial term of
three (3) years and may be renewed by the parties within 30 days prior to the expiration of the employment agreement. On November 11,
2020, the employment agreement with Mr, Huang was renewed for another three (3) years until October 31, 2023, with the similar terms
and conditions. On October 31, 2023, the employement agreement with Mr. Huang was renewed for another three (3) years until October
31, 2026, with similar terms and conditions. Amount reflects salary paid to Mr. Huang for services rendered to our former operating
subsidiary, Sichuan Wetouch. Such employment agreement has been assigned to our Mainland China subsidiary, Sichuan Vtouch.
Under
these agreements, each of the individuals is employed for a specified time period and is entitled to receive annual salary plus other
remuneration, pension insurance, medical insurance, maternity insurance, unemployment insurance, work-related injury insurance, housing
provident funds and other benefits pursuant to PRC law. We and the individuals may terminate the employment upon mutual agreement. Provided
that the individuals propose earlier termination and the agreement is terminated upon mutual agreement. The persons are not entitled
to compensation. The persons may terminate the employment by giving thirty days advance written notice. We may terminate their employment
for cause, at any time, without notice or remuneration, for certain acts of the person, such as serious violation of Sichuan Vtouch’s
rules and regulations, and gross neglect of duty and misconduct resulting in large economic losses to Sichuan Vtouch. We may also terminate
the employment for cause, with thirty days advance written notice and one month’s salary, for certain acts of the executive officer,
such as illness or non-work related injury resulting in inability to work in the previous position or newly assigned position after recovery,
inability to perform the assigned work and after training or adjustment of position, still failure to perform the assigned work. The
employment agreements will be terminated upon (1) expiry of the employment, (2) the entitlement of the named executive officers to the
pension insurance, (3) the death of the named executive officers, (4) the bankruptcy of Sichuan Vtouch, and (5) other circumstances regulated
by laws and regulations.
Each
individual is not permitted to (1) hold any side job during the employment, and (2) operate on their own or on behalf of other individuals
or enterprises any business providing same or similar competitive products or services.
We
have entered into confidentiality and non-competition agreements with each of the individuals in November 2017, which were renewed in
November 2020. Such agreements have been assigned to our Mainland China subsidiary, Sichuan Vtouch. Each individual has agreed
(1) to keep all confidential information confidential and return them together with any copy to Sichuan Vtouch upon termination of employment;
(2) not to disclose the confidential information of Sichuan Vtouch to any third party; (3) not to allow any third party to use or acquire
the confidential information of Sichuan Vtouch, except as required in the performance of his or her duties in connection with the employment
or pursuant to the instruction of the Company; (4) not to use the confidential information of Sichaun Vtouch for its own benefits; and
(4) to keep other confidential obligations. As compensation, each individual is entitled to receive a monthly confidentiality fee at
a different rate. Each individual has also agreed to hold, after the termination or expiry of his employment agreement, in strict confidence,
any of our confidential information without any extra compensation.
Each
officer has agreed to be bound by non-competition restrictions during the term of his employment and for two years following termination
of the employment. The executive officers are not allowed to (1) directly or indirectly invest, establish, or be hired by, any individual
or enterprises engaging in the same or similar business, or competitive business, (2) directly or indirectly persuade, induce, encourage,
or cause any employee of the Company to terminate the employment with Sichuan Vtouch or its subsidiaries; and (3) directly or indirectly
persuade, induce, encourage, or cause any customers of Sichuan Vtouch to terminate the business relationship with Sichuan Vtouch or its
subsidiaries.
Each
officer is obligated to pay $7,110 to $14,220 (equivalent to RMB50,000 to RMB100,000) as a penalty, together with any earnings generated
from the use or disclose of the confidential information, to Sichuan Vtouch for violation of the confidentiality and non-competition
agreements.
PRINCIPAL
STOCKHOLDERS
The
following table lists, as of February 9, 2024, the number of shares of common stock beneficially owned by (i) each person, entity
or group (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) known to the Company to be the beneficial
owner of more than 5% of the outstanding common stock; (ii) each of our directors (iii) each of our Named Executive Officers and (iv)
all executive officers and directors as a group. Information relating to beneficial ownership of common stock by our principal stockholders
and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of
the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if that person directly or indirectly has or shares
voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to
dispose or direct the disposition of the security. The person is also deemed to be a beneficial owner of any security of which that person
has a right to acquire beneficial ownership within 60 days. Under the SEC rules, more than one person may be deemed to be a beneficial
owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any
pecuniary interest. Except as noted below, each person has sole voting and investment power with respect to the shares beneficially owned
and each stockholder’s address is c/o Wetouch Technology Limited, No. 29, Third Main Avenue, Shigao Town, Renshou County, Meishan,
Sichuan, China 620500.
The
percentages below are calculated based on 9,732,948 shares of common stock issued and outstanding as of February 9, 2024, and 11,892,948
shares of common stock issued and outstanding upon the completion of the Underwritten Offering, assuming the underwriters do not
exercise their over-allotments.
| |
Shares
Beneficially Owned Prior
to the Underwritten Offering | | |
Shares Beneficially Owned
After the Underwritten Offering | |
Name of Beneficial Owner | |
Shares | | |
Percentage | | |
Shares | | |
Percentage | |
Executive Officers and Directors: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Fei Bai | |
| 0 | | |
| 0 | % | |
| 0 | | |
| 0 | % |
Jiaying Cai | |
| 41,961 | | |
| 0.431 | % | |
| 41,961 | | |
| 0.35 | % |
Zongyi Lian | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Yuhua Huang | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Jing Chen | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Xiaojin Tang | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Congjin Wang | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
All officers and directors as a group (7 persons) | |
| 41,961 | | |
| 0.431 | % | |
| 41,961 | | |
| 0.35 | % |
| |
| | | |
| | | |
| | | |
| | |
5% or Greater Holders: | |
| | | |
| | | |
| | | |
| | |
N/A | |
| | | |
| | | |
| | | |
| | |
Changes
in Control Agreements.
As
of the date of this prospectus, we are not aware of any arrangements that may result in “changes in control,” as that term
is defined by the provisions of Item 403(c) of Regulation S-K.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The
following is a description of transactions since January 1, 2020 to which we have been a participant in which any of our directors,
executive officers or holders of more than 5% of our voting securities, or any members of their immediate family, had or will have a
direct or indirect material interest, other than compensation arrangements that are described under “Management—Compensation
of Directors” and “Executive Compensation.”
Material Transactions with Related Parties
Sales
of Products to Related Parties
Meishan
Wetouch Technology Co., Ltd (“Meishan Wetouch”)
Sichuan
Wetouch sells capacitive touchscreens to Meishan Wetouch from time to time. For the nine-month period ended September 30,
2023, sales from Sichuan Wetouch to Meishan Wetouch were approximately $nil. For the years ended December 31, 2022 and 2021, sales from
Sichuan Wetouch to Meishan Wetouch were approximately nil and $87,367, respectively. There are no written agreements between Sichuan
Wetouch and Meishan Wetouch. Mr. Guangde Cai, former Chairman and director of the Company, owns 95% of Meishan Wetouch.
Chengdu
Wetouch Technology Co., Ltd. (“Chengdu Wetouch”)
Sichuan
Wetouch sells capacitive touchscreens to Chengdu Wetouch from time to time. For the nine-month period ended September 30,
2023, sales from Sichuan Wetouch to Meishan Wetouch were approximately $nil. For the years ended December 31, 2022 and 2021, sales from
Sichuan Wetouch to Chengdu Wetouch were approximately nil and $10,483, respectively. There are no written agreements between Sichuan
Wetouch and Chengdu Wetouch. Mr. Guangde Cai, former Chairman and director of the Company, owns 94% of Chengdu Wetouch.
Amounts
due from Related Parties
For
the nine-month period ended September 30, 2023, the total amounts due from a related party were $nil. For the years
ended December 31, 2022, 2021 and 2020, the total amounts due from related parties were $nil, $nil and $76,619, respectively. These advances
were non-interest bearing and due on demand. The breakdown of the amount due from related parties are as below:
Mr.
Guangde Cai
As
of June 30, 2020, there were $43,453 employee advances granted by the Company to Mr. Guangde Cai, our former Chairman. Said advances
were the Company’s expenses given to Mr. Cai who utilized such funds on behalf of the Company for international payments to third-party
consultants of the Company. Since the employee advances are not loans from the Company to Mr. Cai, no payments are due to the Company
from Mr. Cai for these advances. As of December 31, 2022, 2021 and 2020, there is no amount due from Mr. Guangde Cai to the Company.
Vision
Touch Technology AG
For
the years ended December 31, 2022, 2021 and 2020, the operating expense advances due from Vision Touch Technology AG were $nil, $nil
and $76,619, respectively. These operating expense advances were non-interest bearing and due on demand. Vision Touch Technology is solely
owned by Mr. Yong Yang, a sales director of Sichuan Wetouch.
Mr.
Zongyi Lian
For
the nine-month period ended September 30, 2023, the employee advances due from Mr. Zongyi Lian were $nil. As of
the date of this prospectus, no advances are due from Mr. Zongyi Lian. For the years ended December 31, 2022, 2021 and 2020, the employee
advances due from Mr. Zongyi Lian were $nil, $nil and $nil respectively.
Amounts
due to Related Parties
For the
nine-month period ended September 30, 2023, the total amounts due to a related party were $nil. For the years ended December
31, 2022, 2021, and 2020, the total amounts due to related parties were $1,665, $34,669, and $529,060,
respectively. These advances are non-interest bearing and due on demand, with the details provided below:
Chengdu Wetouch
Technology Co., Ltd (“Chengdu Wetouch”)
For
the years ended December 31, 2022, 2021 and 2020, the operating expenses advanced by Chengdu Wetouch to Sichuan Wetouch were nil, nil,
and $134,616, respectively. These advances are non-interest bearing and due on demand.
Chengdu
Wetouch specializes in the research, development, manufacturing and sales of resistive touchscreens widely used in HMI and military industries.
There are no written agreements between Sichuan Wetouch and Chengdu Wetouch. Mr. Guangde Cai, our former Chairman and director, is the
majority shareholder of Chengdu Wetouch.
Meishan Wetouch
For
the years ended December 31, 2022, 2021 and 2020, the operating expenses advanced by Meishan Wetouch to Sichuan Wetouch were nil, nil,
and $68,402, respectively. These advances are non-interest bearing and due on demand. Mr. Guangde Cai, the former Chairman and director
of the Company and our indirect majority shareholder, owns 95% of Meishan Wetouch.
Mr.
Guangde Cai
For
the years ended December 31, 2022, 2021, and 2020, Sichuan Wetouch owed Mr. Guangde Cai nil, $32,867, and $326,042,
respectively. These advances
are non-interest bearing and due on demand.
Mr.
Zongyi Lian
For the
years ended December 31, 2022, 2021 and 2020, Sichuan Wetouch owed Mr. Zongyi Lian $1,665, $1,802 and $nil,
respectively. These advances are non-interest bearing and due on demand.
Acquisition
of HK Wetouch
HK
Wetouch, an affiliate of Guangde Cai, our former chairman and director, was incorporated on December 3, 2020 under the laws of Hong Kong,
which in turn owns all the outstanding shares of Sichuan Vtouch. Sichuan Vtouch was incorporated on December 30, 2020 in Chengdu, Sichuan,
under the PRC laws.
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.
As
BVI Wetouch owns all the outstanding shares of HK Wetouch, which, in turn, owns all the outstanding shares of Sichuan Vtouch, HK Wetouch
and Sichuan Vtouch became our indirect wholly-owned subsidiaries.
Review,
Approval and Ratification of Related Party Transactions
Given
our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification
of transactions, such as those described above, with our executive officer(s), director(s) and significant stockholders. We intend to
establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so
that such transactions will be subject to the review, approval or ratification of our Board of Directors, or an appropriate committee
thereof. On a moving forward basis, our directors will continue to approve any related party transaction.
Legal
Proceedings
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.
From
time to time, the Company and its affiliates are parties to various legal actions arising in the ordinary course of business. Although
our subsidiaries and/or 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 our former Chairman Mr. Guangde Cai were unconditionally and fully
discharged and released therefrom. See Note 13 to the Consolidated Financial Statements contained in this prospectus.
Accordingly, there are no pending material legal proceedings against the Company or Mr. Cai.
DESCRIPTION
OF SECURITIES
The
following description of our capital stock is only a summary and is qualified in its entirety by the provisions of our articles of incorporation,
as amended and bylaws, which have been filed as exhibits to the registration statement of which this prospectus forms a part.
Description
of Common Stock
We
are authorized to issue 15,000,000 shares of common stock at a par value of $0.001 and as of the date of this prospectus, we had 9,732,948
shares of common stock issued and outstanding. The voting, dividend and liquidation rights of the holders of shares of common stock
are subject to, and qualified by, the rights of the holders of the preferred stock, if any, of the Company.
Dividend
Rights
The
holders of outstanding shares of our common stock are entitled to receive dividends out of funds legally available at the times and in
the amounts that our board of directors may determine.
Voting
Rights
Each
holder of our common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our articles of incorporation, which means that the holders of
a majority of our shares of common stock voted can elect all of the directors then standing for election.
Reverse
Stock Split
We filed a Certificate of Change on September 7, 2023 with the Secretary of State of the State of Nevada to effectuate
a 1-for-20 reverse stock split of our outstanding common stock, with the number of authorized shares of common stock reduced ratably (the
“2023 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
Reverse Stock Split was effective as of the opening of trading on September 12, 2023 and the Company’s shares of common stock
continued trading on the OTCQB marketplace under the symbol “WETHD” for a period of 20 business days, and thereafter, the
symbol will return to “WETH”.
Description
of Preferred Stock
We
are authorized to issue 10,000,000 shares of preferred stock at a par value of $0.001 and as of the date of this prospectus, we
had no shares of preferred stock issued and outstanding.
Preferred
Stock
The
preferred stock may be issued at any time or from time to time, in any one or more series, and any such series shall be comprised of
such number of shares and may have such voting powers, whole or limited, or no voting powers, and such designations, preferences and
relative, participating, options or other special rights and qualifications, limitations, or restrictions thereof, including liquidation
preferences, as shall be stated and expressed in the board resolutions of the Company.
Warrants
As
of September 30, 2023, the Company had 35,861 warrants outstanding issued in relation to certain services provided to the
Company with i) weighted average exercise price of $0.01; ii) weighted average remaining contractual life of 0.2 years; and iii) aggregate
intrinsic value of $0.4 million.
Underwriter’s
Warrants
The
registration statement of which this prospectus is a part also registers for sale common stock underlying the Underwriter’s
Warrants, which warrants are a portion of the underwriting compensation payable to the Representatives in connection with this
Underwritten Offering. The Underwriter’s Warrants will be exercisable, in whole or in part, commencing on a date which is one
hundred eighty (180) days after the commencement of sales of the Underwritten Offering until the fifth anniversary of the date of
the commencement of sales of the Underwritten Offering at an exercise price of $6.25 (125.0% of the public offering price of
the shares). Please see “Underwriting—Underwriter’s Warrants” for a description of the warrants we have
agreed to issue to the Representatives in this Underwritten Offering, subject to the completion of the Underwritten Offering. We
expect to enter into a warrant agreement in respect of the Underwriter’s Warrants prior to the closing of this Underwritten
Offering.
Other Convertible Securities
On
November 3, 2021, the Company entered into a Securities Purchase Agreement (the “Talos Purchase Agreement”) with Talos Victory
Fund, LLC, a Delaware limited liability company (the “Talos Lender”), dated as of October 27, 2021, pursuant to which the
Company issued the Talos Lender a convertible promissory note in the principal amount of $250,000 (the “Talos Note”) and
a three-year warrant (the “Talos Warrant”) to purchase an aggregate of 200,000 shares (pre-2023 Reverse Stock Split) (10,000
shares post-2023 Reverse Stock Split) of the Company’s common stock (the “Talos Warrant Shares”). The Company received
$225,000 gross proceeds from the issuance of the Talos Note as a result of the original discount rate on the Talos Note.
On
November 9, 2021, the Company entered into a Securities Purchase Agreement (the “Mast Hill Purchase Agreement”) with Mast
Hill Fund, L.P., a Delaware limited partnership (the “Mast Hill Lender”), dated as of November 5, 2021, pursuant to which
the Company issued the Mast Hill Lender a convertible promissory note in the principal amount of $750,000 (the “Mast Hill Note”)
and a three-year warrant (the “Mast Hill Warrant”) to purchase an aggregate of 600,000 shares (pre-2023
Reverse Stock Split) (30,000 shares post-2023 Reverse Stock Split) of the Company’s common stock (the “Mast
Hill Warrant Shares”). The Company received $675,000 gross proceeds from the issuance of the Mast Hill Note as a result of the
original discount rate on the Mast Hill Note.
On
November 29, 2021, the Company entered into a Securities Purchase Agreement (the “LGH Purchase Agreement”) with LGH Investments,
LLC, a Wyoming limited liability company (the “LGH Lender”), dated as of November 24, 2021, pursuant to which the Company
issued the LGH Lender a convertible promissory note in the principal amount of $250,000 (the “LGH Note”) and a three-year
warrant (the “LGH Warrant”) to purchase an aggregate of 200,000 shares (pre-2023
Reverse Stock Split) (10,000 shares post-2023 Reverse Stock Split) of the Company’s common stock (the “LGH
Warrant Shares”). The Company received $225,000 gross proceeds from the issuance of the LGH Note as a result of the original discount
rate on the LGH Note.
On
December 2, 2021, the Company entered into a Securities Purchase Agreement (the “FirstFire Purchase Agreement”) with FirstFire
Global Opportunities Fund, LLC, a Delaware limited liability company (the “FirstFire Lender”), dated as of November 16, 2021,
pursuant to which the Company issued the FirstFire Lender a convertible promissory note in the principal amount of $250,000 (the “FirstFire
Note”) and a three-year warrant (the “FirstFire Warrant”) to purchase an aggregate of 200,000 shares (pre-2023
Reverse Stock Split) (10,000 shares post-2023 Reverse Stock Split) of the Company’s common stock (the “FirstFire
Warrant Shares”). The Company received $225,000 gross proceeds from the issuance of the FirstFire Note as a result of the original
discount rate on the FirstFire Note.
On
December 9, 2021, the Company entered into a Securities Purchase Agreement (the “Fourth Man Purchase Agreement”) with Fourth
Man, LLC, a Nevada limited liability company (the “Fourth Man Lender”), dated as of November 29, 2021, pursuant to which
the Company issued the Fourth Man Lender a convertible promissory note in the principal amount of $250,000 (the “Fourth Man Note”)
and a three-year warrant (the “Fourth Man Warrant”) to purchase an aggregate of 200,000 shares (pre-2023
Reverse Stock Split) (10,000 shares post-2023 Reverse Stock Split) of the Company’s common stock (the “Fourth
Man Warrant Shares”). The Company received $225,000 gross proceeds from the issuance of the Fourth Man Note as a result of the
original discount rate on the Fourth Man Note.
On
December 10, 2021, the Company entered into a Securities Purchase Agreement (the “Jefferson Street Purchase Agreement”) with
Jefferson Street Capital LLC, a New Jersey limited liability company (the “Jefferson Street Lender”), dated as of December
2, 2021, pursuant to which the Company issued the Jefferson Street Lender a convertible promissory note in the principal amount of $250,000
(the “Jefferson Street Note”) and a three-year warrant (the “Jefferson Street Warrant”) to purchase an aggregate
of 200,000 shares (pre-2023 Reverse
Stock Split) (10,000 shares post-2023 Reverse Stock Split) of the Company’s common stock (the “Jefferson Street
Warrant Shares”). The Company received $225,000 gross proceeds from the issuance of the Jefferson Street Note as a result of the
original discount rate on the Jefferson Street Note.
On
December 14, 2021, the Company entered into a Securities Purchase Agreement (the “Blue Lake Purchase Agreement,” together
with the Talos Purchase Agreement, the Mast Hill Purchase Agreement, the LGH Purchase Agreement, the FirstFire Purchase Agreement, the
Fourth Man Purchase Agreement, and the Jefferson Street Purchase Agreement, the “Purchase Agreements”) with Blue Lake Partners,
LLC, a Delaware limited liability company (the “Blue Lake Lender,” together with the Talos Lender, the Mast Hill Lender,
the LGH Lender, the FirstFire Lender, the Fourth Man Lender, and the Jefferson Street Lender, the “Lenders”), dated as of
December 2, 2021, pursuant to which the Company issued the Blue Lake Lender a convertible promissory note in the principal amount of
$250,000 (the “Blue Lake Note,” together with the Talos Note, the Mast Hill Note, the LGH Note, the FirstFire Note, the Fourth
Man Note, and the Jefferson Street Note, the “Notes”) and a three-year warrant (the “Blue Lake Warrant,” together
with the Talos Warrant, the Mast Hill Warrant, the LGH Warrant, the FirstFire Warrant, the Fourth Man Warrant, and the Jefferson Street
Warrant, the “Warrants”) to purchase an aggregate of 200,000 shares (pre-2023
Reverse Stock Split) (10,000 shares post-2023 Reverse Stock Split) of the Company’s common stock (the “Blue
Lake Warrant Shares,” together with the Talos Warrant Shares, the Mast Hill Warrant Shares, the LGH Warrant Shares, the FirstFire
Warrant Shares, the Fourth Man Warrant Shares, and the Jefferson Street Warrant Shares, the “Warrant Shares”). The Company
received $225,000 gross proceeds from the issuance of the Blue Lake Note as a result of the original discount rate on the Blue Lake Note.
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 16%.
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 Uplist Offering; otherwise,
the conversion price is $0.75 per share (pre-2023 Revere Stock Split).
Subject
to customary exceptions, if the Company issues shares or any securities convertible into shares of common stock at an effective price
per share lower than the conversion 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 this offering). If the Company prepays the Notes prior to the Maturity Date, the Company shall
pay a 10% prepayment penalty. The Company and the Lenders have agreed that the Company shall repay the Notes in full from the proceeds
of this offering. Based on this agreement, certain Lenders have further agreed not to convert any outstanding amount of the Notes or exercise
the Warrants prior to this offering.
Craft
received a fee of $162,000 in total in connection with the issuance of all of the Notes and Warrants to the Lenders.
Warrants
The
Warrants issued to the Lenders granted the Mast Hill Lender the right to purchase up to 600,000 shares of common stock of the Company
(pre-2023 Reverse Stock Split) (30,000 shares post-2023 Reverse Stock Split) and
each of the other Lenders the right to purchase up to 200,000 shares of common stock of the Company (pre-2023 Reverse Stock Split) (10,000
shares post-2023 Reverse Stock Split), at an exercise price of $1.25 per share (pre-2023 Reverse Stock Split) ($25.00 per
share post-2023 Reverse Stock Split). 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 $1.25 per 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.
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.
Pursuant
to the terms of each of the Registration Rights Agreements, executed between the Company and the Lenders, the Company agreed to file
a registration statement with the 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.
The
Notes and Warrants described above were offered and sold in reliance upon exemptions from registration pursuant to Section 4(a)(2) under
the Securities Act of 1933, as amended (the “1933 Act”), and Rule 506(b) promulgated under the 1933 Act.
Transfer
Agent
The
transfer agent and registrar for our common stock is Transhare Corporation, at 17755 US Highway 19 N. Suite 140, Clearwater, FL 33764.
Lock-up
Pursuant
to certain “lock-up” agreements, we, our executive officers, directors, and security holders holding more than 5% of the
Company’s common stock intend to agree, subject to certain exceptions, not to offer, sell, assign, transfer, pledge, contract to
sell, or otherwise dispose of or announce the intention to otherwise dispose of, or enter into any swap, hedge or similar agreement or
arrangement that transfers, in whole or in part, the economic risk of ownership of, directly or indirectly, engage in any short selling
of any common stock or securities convertible into or exchangeable or exercisable for any common stock, whether currently owned or subsequently
acquired, without the prior written consent of the Representatives, for a period of 180 days from the date of the final prospectus. In
addition, during such period, except for the registration statement of which this prospectus forms a part or a registration statement
on Form S-8 in connection with the registration of shares of common stock issuable under any employee equity-based compensation plan,
incentive plan, stock plan, dividend reinvestment plan adopted and approved by the Company’s board of directors, we will not file
or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company
or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company.
Anti-Takeover
Provisions
Certain
provisions of Nevada law and our bylaws summarized below, may have the effect of delaying, deferring or discouraging another person from
acquiring control of us.
It
is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise
consider to be in their best interest or in our best interests, including transactions that might result in a premium over the market
price for our shares.
These
provisions expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage
persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh
the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.
Nevada
Law
The
Nevada Business Corporation Act (the “NBCA”) contains a control-share acquisition statute that provides that a person who
acquires shares in an “issuing public corporation,” as defined in the statute, in excess of certain specified thresholds
generally will not have any voting rights with respect to such shares unless such voting rights are approved by the holders of a majority
of the votes of each class of securities entitled to vote separately, excluding shares held or controlled by the acquiring person.
The
NBCA also provides that an “affiliated transaction” between a Nevada corporation with an “interested shareholder,”
as those terms are defined in the statute, generally must be approved by the affirmative vote of the holders of two-thirds of the outstanding
voting shares, other than the shares beneficially owned by the interested shareholder. The NBCA defines an “interested shareholder”
as any person who is the beneficial owner of 10% or more of the outstanding voting shares of the corporation.
These
laws could delay or prevent an acquisition.
Special
Stockholder Meetings
Our
bylaws provide that a special meeting of stockholders may be called by of the Chairman of our board of directors, our CEO, President
or the Secretary.
Requirements
for Advance Notification of Stockholder Nominations and Proposals
Our
bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors.
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The
following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the
purchase, ownership and disposition of our common stock, but does not purport to be a complete analysis of all potential tax effects.
The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are
not discussed. This discussion is based on the Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings
and administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date
hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied
retroactively in a manner that could adversely affect a Non-U.S. Holder. We have not sought and will not seek any rulings from the IRS
regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed
below regarding the tax consequences of the purchase, ownership, and disposition of our common stock.
This
discussion is limited to Non-U.S. Holders that hold our common stock as a “capital asset” within the meaning of Section 1221
of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant
to a Non-U.S. Holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income
or the alternative minimum tax. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules,
including, without limitation:
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U.S.
expatriates and former citizens or long-term residents of the United States; |
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persons
holding our common stock as part of a hedge, straddle, or other risk reduction strategy or as part of a conversion transaction or
other integrated investment; |
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banks,
insurance companies, and other financial institutions; |
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brokers,
dealers, or traders in securities; |
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“controlled
foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid
U.S. federal income tax; |
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partnerships
or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein); |
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tax-exempt
organizations or governmental organizations; |
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persons
deemed to sell our common stock under the constructive sale provisions of the Code; |
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persons
who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation; |
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tax-qualified
retirement plans; |
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“qualified
foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified
foreign pension funds; and |
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persons
subject to special tax accounting rules as a result of any item of gross income with respect to our common stock being taken into
account in an applicable financial statement. |
If
an entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the
partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner
level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding
the U.S. federal income tax consequences to them.
THIS
DISCUSSION IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME
TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND DISPOSITION OF OUR COMMON
STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL, OR NON-U.S. TAXING JURISDICTION
OR UNDER ANY APPLICABLE INCOME TAX TREATY.
Definition
of Non-U.S. Holder
For
purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of our common stock that is neither a “U.S.
person” nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S.
federal income tax purposes, is or is treated as any of the following:
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individual who is a citizen or resident of the United States; |
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a
corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia; |
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an
estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
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a
trust that (i) is subject to the primary supervision of a U.S. court and all substantial decisions of which are subject to the control
of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (ii) has a valid election
in effect to be treated as a United States person for U.S. federal income tax purposes. |
Distributions
As
described in the section titled “Dividend Policy,” we do not anticipate declaring or paying any cash dividends in the foreseeable
future. However, if we do make distributions of cash or property on our common stock, such distributions will constitute dividends for
U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and
first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its common stock, but not below zero. Any excess
will be treated as capital gain and will be treated as described below under the subsection titled “ — Sale or Other Taxable
Disposition.”
Subject
to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder will be subject to U.S. federal withholding
tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided
the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the
lower treaty rate). A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty
rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders
should consult their tax advisors regarding their entitlement to benefits under any applicable tax treaties.
If
dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within
the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the
United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described
above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying
that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.
Any
such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S.
Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable
income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax
advisors regarding any applicable tax treaties that may provide for different rules.
Sale
or Other Taxable Disposition
Subject
to the discussion below regarding backup withholding, a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized
upon the sale or other taxable disposition of our common stock unless:
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the
gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required
by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain
is attributable); |
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the
Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the
disposition and certain other requirements are met; or |
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our
common stock constitutes a U.S. real property interest (“USRPI”), by reason of our status as a U.S. real property holding
corporation (“USRPHC”), for U.S. federal income tax purposes. |
Gain
described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular rates.
A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by
an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
A
Non-U.S. Holder described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower
rate specified by an applicable income tax treaty) on any gain realized upon the sale or other taxable disposition, which may be offset
by certain U.S. source capital losses of theNon-U.S. Holder (even though the individual is not considered a resident of the United States),
provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.
With
respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination
of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S.
real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one
in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition of our common stock
by a Non-U.S. Holder will not be subject to U.S. federal income tax if our common stock is “regularly traded,” as defined
by applicable Treasury Regulations, on an established securities market, and such Non-U.S. Holder owned, actually and constructively,
5% or less of our common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition
or the Non-U.S. Holder’s holding period.
Non-U.S.
Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.
Information
Reporting and Backup Withholding
Payments
of dividends on our common stock will not be subject to backup withholding, provided the Non-U.S. Holder certifies its non-U.S. status,
such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E, or W-8ECI, or otherwise establishes an exemption. However, information returns
are required to be filed with the IRS in connection with any distributions on our common stock paid to the Non-U.S. Holder, regardless
of whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our common stock within the
United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting
if the applicable withholding agent receives the certification described above or the Non-U.S. Holder otherwise establishes an exemption.
Proceeds of a disposition of our common stock conducted through a non-U.S. office of a non-U.S. broker that does not have certain enumerated
relationships with the United States generally will not be subject to backup withholding or information reporting.
Copies
of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement
to the tax authorities of the country in which the Non-U.S. Holder resides or is established.
Backup
withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit
against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Additional
Withholding Tax on Payments Made to Foreign Accounts
Withholding
taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance
Act (“FATCA”)) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities.
Specifically, a 30% withholding tax may be imposed on dividends on, or (subject to the proposed Treasury Regulations discussed below)
gross proceeds from the sale or other disposition of, our common stock paid to a “foreign financial institution” or a “non-financial
foreign entity” (each as defined in the Code), unless (i) the foreign financial institution undertakes certain diligence and reporting
obligations, (ii) the non-financial foreign entity either certifies it does not have any “substantial United States owners”
(as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (iii) the foreign financial
institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial
institution and is subject to the diligence and reporting requirements in (i) above, it must enter into an agreement with the U.S. Department
of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States
persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain information
about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders.
Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA
may be subject to different rules.
Under
the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on
our common stock. While withholding under FATCA would have applied also to payments of gross proceeds from the sale or other disposition
of stock on or after January 1, 2019, proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely.
Taxpayers generally may rely on these proposed Treasury Regulations until final Treasury Regulations are issued.
Prospective
investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our
common stock.
ENFORCEABILITY OF CIVIL LIABILITIES
We were incorporated
under the laws of Nevada on August 31, 1992. As a holding company with no material operations of our own, we conduct substantially all
of our operations through our operating companies established in Mainland China.
Most of our assets
are located in Mainland China, and substantially all of our assets are located outside of the United States. All of our directors and
officers reside within Mainland China and are Mainland China nationals, and substantially all of the assets of these persons are located
outside the United States. As a result, it may be difficult for investors
to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in
United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States
or any state in the United States.
Hong Kong
There is currently
no arrangement providing for the reciprocal enforcement of judgements between Hong Kong and the United States, as such judgments of United
States courts will not be directly enforced in Hong Kong. However, under common law, a foreign judgment (including one from federal or
state court in the United States) obtained against the Company may generally be treated by the courts of Hong Kong as a cause of action
in itself and sued upon as a debt between the parties. In a common law action for enforcement of a foreign judgment, the judgment creditor
has to prove that (i) the judgment is in personam; (ii) the judgment is in the nature of a monetary award; (iii) the judgment
is final and conclusive on the merits and has not been stayed or satisfied in full; and (iv) the judgement is from a court of competent
jurisdiction. The defenses available to the defendant in a common law action for enforcement of a foreign judgment include breach of
natural justice, fraud and contrary to public policy of Hong Kong. In order to enforce the foreign judgment at common law, fresh proceedings
must be initiated in Hong Kong, which involves issuing a Writ of Summons and Statement of Claim attaching the foreign judgment as proof
of the debt.
Mainland China
There is uncertainty
as to whether the Mainland China courts would (i) recognize or enforce judgments of United States courts obtained against us or our directors
or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States,
or (ii) entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the
securities laws of the United States or any state in the United States.
The recognition
and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. The Mainland China courts may recognize and
enforce foreign judgments in accordance with the requirements of the Mainland China Civil Procedures Law based either on treaties between
Mainland China and the country where the judgment is made or on principles of reciprocity between jurisdictions. There exists no treaty
and few other forms of reciprocity between Mainland China and the United States or the Cayman Islands governing the recognition and enforcement
of foreign judgments as of the date of this prospectus. In addition, according to the PRC Civil Procedures Law, the Mainland China courts
will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles
of Mainland China law or national sovereignty, security, or public interest. As a result, it is uncertain whether and on what basis a
Mainland China court would enforce a judgment rendered by a court in the United States or the Cayman Islands. In addition, it will be
difficult for U.S. shareholders to originate actions against us in Mainland China in accordance with PRC laws because we are incorporated
under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding our Shares, to establish
a connection to Mainland China for a Mainland China court to have jurisdiction as required under the PRC Civil Procedures Law.
British Virgin Islands
There is uncertainty
as to whether the courts of the BVI would (i) recognize or enforce judgments of United States courts obtained against us or our directors
or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States
or (ii) entertain original actions brought in the BVI against us or our directors or officers predicated upon the securities laws of
the United States or any state in the United States.
There is uncertainty
with regard to BVI law as to whether a judgment obtained from the United States courts under civil liability provisions of the securities
laws will be determined by the courts of the BVI as penal or punitive in nature. If such a determination is made, the courts of the BVI
are also unlikely to recognize or enforce the judgment against a BVI company. Because the courts of the BVI have yet to rule on whether
such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the BVI. Although there is no statutory
enforcement in the BVI of judgments obtained in the federal or state courts of the United States, in certain circumstances a judgment
obtained in such jurisdiction may be recognized and enforced in the courts of the BVI at common law, without any re-examination of
the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the High Court of the BVI, provided such
judgment:
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court of competent jurisdiction and such foreign court had proper jurisdiction over the parties subject to such judgment; |
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imposes on the judgment
debtor a liability to pay a liquidated sum for which the judgment has been given; |
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is final; |
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no new admissible evidence
relevant to the action is submitted prior to the rendering of the judgment by the courts of the BVI; |
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is not in respect of taxes,
a fine, a penalty or similar fiscal or revenue obligations of the company; |
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was not obtained in a
fraudulent manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the British
Virgin Islands. |
In appropriate
circumstances, a BVI Court may give effect in the BVI to other kinds of final foreign judgments such as declaratory orders, orders for
performance of contracts and injunctions.
UNDERWRITING
Subject
to the terms and conditions of the underwriting
agreement, the underwriters named below, for whom WestPark Capital, Inc. and Craft are acting as Representatives of underwriters
with WestPark Capital, Inc. also acting as the Lead Book Running Manager, have agreed to purchase from us on a firm
commitment basis the number of shares of common stock indicated below, at the public offering price set forth on the cover page of this
prospectus, less the underwriting discounts and commissions:
Underwriters | |
Number of Shares | |
WestPark Capital, Inc. | |
| 587,000 | |
Craft Capital Management LLC | |
| 400,000 | |
R.F. Lafferty & Co., Inc. | |
| 587,000 | |
Orientiert XYZ Securities Limited | |
| 586,000 | |
Total | |
| 2,160,000 | |
A form of the underwriting agreement
has been filed as an exhibit to the registration statement of which this prospectus is part.
The
underwriting agreement provides that the obligation of the underwriters to purchase all of the shares of common stock being offered to
the public is subject to specific conditions, including the absence of any material adverse change in our business or in the financial
markets and the receipt of certain legal opinions, certificates and letters from us, our counsel and the independent auditors. Subject
to the terms of the underwriting agreement, the underwriters will purchase all of the shares being offered to the public, other than
those covered by the over-allotment option described below, if any of these shares are purchased.
We
have granted an option to the underwriters exercisable for forty-five (45) days after the date of this prospectus, to purchase up to
324,000 additional shares of common stock equal to 15% of the number of shares of common stock sold in the Underwritten Offering
at the public offering price, less the underwriting discounts and commission. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the shares offered by this prospectus. To the extent that the underwriters exercise
this option, the underwriters will become obligated, subject to conditions, to purchase, and we will be obligated to sell, the additional
shares.
Offers
and sales for this Underwritten Offering will be conducted both inside and outside the United States through the underwriters and their
respective selling agents. All offers or sales in the United States will be conducted by broker-dealers registered with the Commission
and members of FINRA. The address of WestPark Capital, Inc. is 1800 Century Park East, Suite 220, Los Angeles, CA 90077. The address
of Craft is 377 Oak Street, Lower Concourse, Garden City, NY 11530. The address of Lafferty is 40 Wall Street, 29th Floor.
New York, NY 10005. The address of Orientiert XYZ Securities Limited is Room 3301, Tower One Lippo Centre, No.89 Queensway, Admiralty,
Hong Kong.
Underwriting
Discount and Expenses
The
following table shows, for each of the total without over-allotment option and total with full over-allotment option offering amounts,
the per share and total public offering price, underwriting discounts to be paid to the underwriters by us, and proceeds to us,
before expenses:
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Total | |
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Per Share | | |
Without Over-Allotment | | |
With Full Over-Allotment | |
Public offering price | |
$ | 5.00 | | |
$ | 10,800,000 | | |
$ | 12,420,000 | |
Underwriting discounts (7.0%) | |
$ | 0.35 | | |
$ | 756,000 | | |
$ | 869,400 | |
Proceeds, before expense, to us | |
$ | 4.65 | | |
$ | 10,044,000 | | |
$ | 11,550,600 | |
We
estimate the total expenses payable by us for the Underwritten Offering to be approximately $1,561,787, which amount includes (i)
various costs and fees incurred by us in connection with the Underwritten Offering, (ii) the underwriting discount of $756,000
(7.0%), (iii) reimbursement of the accountable, out-of-pocket expenses of the Representatives in connection with the Underwritten Offering,
including, but not limited to, “road show” expenses and fees and expenses of their legal counsel, up to $180,000 in the aggregate,
of which $50,000 as initial advance have been paid to the Representatives and an additional advance of $50,000 will be paid to the Representatives
upon the receipt of the “No Objection Letter” from FINRA, and (iv) $100,000 to be paid to the Representatives for their non-accountable
expenses at the closing of the Underwritten Offering.
Underwriter
Warrants
In
addition, we intend to issue warrants to the Representatives to purchase a number of shares of common stock equal to 2.0% of the total
number of shares of common stock (including any shares sold in the Underwritten Offering to cover over-allotments) sold in the Underwritten
Offering at an exercise price equal to 125.0% of the public offering price. These warrants will not be exercised, sold, transferred,
assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result
in the effective economic disposition of the securities for a period of 180 days beginning on the date of commencement of sales of the
Underwritten Offering pursuant to FINRA Rule 5110(e)(1). In addition, these warrants will not be exercisable for more than five years
from the commencement of sales of the Underwritten Offering pursuant to FINRA Rule 5110(g)(8)(A). These warrants do not contain anti-dilution
terms that allow the Representatives to receive more shares or to exercise at a lower price than originally agreed upon at the time of
the Underwritten Offering, when the public shareholders have not been proportionally affected by a stock split, stock dividend, or other
similar event. Nor do these warrants include any anti-dilution terms that allow the Representatives to receive or accrue cash dividends
prior to the exercise of the warrants. With respect to shares of common stock underlying the underwriter’s warrants, we have also
agreed to grant the Representatives a one-time demand registration right at our expense with a duration of no more than five years from
the commencement of sales of the Underwritten Offering and unlimited “piggyback” registration rights with duration of no
more than five years from the commencement of sales of the Underwritten Offering at our expense.
Private
Placement Consent Agreement
On
January 19, 2023, we entered into a Securities Purchase Agreement with the buyers indicated therein (collectively, the “Buyers”),
pursuant to which the Company sold to the Buyers an aggregate of 160,000,000 shares of the common stock of the Company for an aggregate
purchase price of $40,000,000, or $0.25 per share (the “Private Placement”). On March 18, 2023, we entered into an agreement
with Craft and Lafferty pursuant to which Craft and Lafferty agreed to consent to the Private Placement, and we agreed
to pay Craft and Lafferty a fee of $1,200,000, payable only upon the closing of the Underwritten Offering. If the Underwritten
Offering is not completed by November 1, 2023, Craft and Lafferty reserve their rights to pursue any and all claims, actions or
remedies available to them regarding the Private Placement under the engagement among us, Craft and Lafferty.
Determination
of Offering Price
Our common stock was quoted
on the OTCQB under the symbol “WETH.” On February 9, 2024, the closing
bid price of our common stock on the OTCQB was $5.45 per share. We have been approved to list our common stock on the Nasdaq Capital Market under the symbol “WETH.”
The
public offering price of the shares of common stock offered by this prospectus will be determined by negotiation between us and the Representatives.
Among the factors to be considered in determining the public offering price of the shares of common stock are:
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our
history, capital structure and our business prospects; |
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industry in which we operate; |
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past and present operating results; |
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previous experience of our executive officers; |
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the
recent trading and closing bid prices of our common stock quoted on the OTCQB; and |
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the
general condition of the securities markets at the time of the Underwritten Offering. |
The
offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares of
common stock sold in the Underwritten Offering. The values of such shares of common stock are subject to change as a result of market
conditions and other factors. We offer no assurances that the offering price will correspond to the price at which our shares of common
stock will trade in the public market subsequent to this Underwritten Offering or that an active trading market for our shares will develop
and continue after this Underwritten Offering.
Lock-Up
Agreements
Pursuant
to certain “lock-up” agreements, we, our executive officers, directors, and security holders holding more than 5% of the
Company’s common stock intend to agree, subject to certain exceptions, not to offer, sell, assign, transfer, pledge, contract to
sell, or otherwise dispose of or announce the intention to otherwise dispose of, or enter into any swap, hedge or similar agreement or
arrangement that transfers, in whole or in part, the economic risk of ownership of, directly or indirectly, engage in any short selling
of any common stock or securities convertible into or exchangeable or exercisable for any common stock, whether currently owned or subsequently
acquired, without the prior written consent of the Representatives, for a period of 180 days from the date of the final
prospectus. In addition, during such period, except for the registration statement of which this prospectus forms a part or a registration
statement on Form S-8 in connection with the registration of shares of common stock issuable under any employee equity-based compensation
plan, incentive plan, stock plan, dividend reinvestment plan adopted and approved by the Company’s board of directors, we
will not file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital
stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company
Price
Stabilization, Short Positions and Penalty Bids
In
connection with the Underwritten Offering, the underwriters may engage in stabilizing transactions, over-allotment transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act:
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Stabilizing
transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. |
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Over-allotment
involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered
short position, the number of shares of common stock over-allotted by the underwriters is not greater than the number of shares that
may be purchased in the over-allotment option. In a naked short position, the number of shares involved is greater than the number
of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising the over-allotment
option and/or purchasing shares of common stock in the open market. |
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Syndicate
covering transactions involve purchases of shares of common stock in the open market after the distribution has been completed
in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters
will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which
it may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment
option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who purchase in the Underwritten Offering. |
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Penalty
bids permit the underwriters to reclaim a selling concession from a syndicate member when the shares of common stock originally
sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
These
stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price
of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As a result, the
price of our shares of common stock may be higher than the price that might otherwise exist in the open market. Neither we nor the underwriters
make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on
the price of our shares of common stock. In addition, neither we nor the underwriters make any representations that the underwriters
will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Electronic
Offer, Sale and Distribution of Shares
In
connection with the Underwritten Offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic
means, such as e-mail. A prospectus in electronic format may be made
available on the websites maintained by one or more underwriters or selling group members, if any, participating in the Underwritten
Offering. The Representatives may agree to allocate a number of shares of common stock to underwriters and selling group members
for sale to their online brokerage account holders. Internet distributions will be allocated by the Representatives to underwriters and
selling group members that may make internet distributions on the same basis as other allocations. Other than the prospectus in electronic
format, the information on the underwriters’ websites and any information contained in any other website maintained by the underwriters
is not part of this prospectus, has not been approved and/or endorsed by us or the underwriters and should not be relied upon
by investors.
Other
Relationships
The
underwriters and their respective affiliates are full-service financial institutions engaged in various activities, which may include
securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment,
hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have provided
from time to time, and may provide in the future, investment and commercial banking and financial advisory services to us and our affiliates
in the ordinary course of business, for which they have received and may continue to receive customary fees and commissions. In the ordinary
course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments
and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for
their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or
instruments of ours. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express
independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire,
long and/or short positions in such securities and instruments.
Indemnification
We
intend to indemnify the underwriters against certain liabilities, including certain liabilities arising under the Securities Act or to
contribute to payments that an underwriter may be required to make for these liabilities.
Offers
Outside the United States
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the shares of common
stock offered by this prospectus in any jurisdiction where action for that purpose is required. The shares of common stock offered by
this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements
in connection with the offer and sale of any such shares be distributed or published in any jurisdiction, except under circumstances
that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and to observe any restrictions relating to the Underwritten Offering and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of common stock
offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
The
underwriters are expected to make offers and sales both in and outside the United States through their selling agents. Any offers and
sales in the United States will be conducted by broker-dealers registered with the SEC.
Australia
No
placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities
and Investments Commission (“ASIC”), in relation to the Underwritten Offering. This prospectus does not constitute
a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the “Corporations Act”),
and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document
under the Corporations Act. Any offer in Australia of the shares of common stock may only be made to persons (the “Exempt Investors”)
who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors”
(within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section
708 of the Corporations Act so that it is lawful to offer the shares of common stock without disclosure to investors under Chapter 6D
of the Corporations Act. The shares of common stock applied for by Exempt Investors in Australia must not be offered for sale in Australia
in the period of 12 months after the date of allotment under the Underwritten Offering, except in circumstances where disclosure
to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations
Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any
person acquiring shares of common stock must observe such Australian on-sale restrictions. This prospectus contains general information
only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does
not contain any shares of common stock recommendations or financial product advice. Before making an investment decision, investors need
to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary,
seek expert advice on those matters.
Bermuda
The
shares of common stock may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003
of Bermuda which regulates the sale of securities in Bermuda. Additionally, non-Bermudian persons (including companies) may not carry
on or engage in any trade or business in Bermuda unless such persons are permitted to do so under applicable Bermuda legislation.
British
Virgin Islands
The
shares of common stock are not being, and may not be offered to the public or to any person in the British Virgin Islands for purchase
or subscription by us or on our behalf. The shares of common stock may be offered to companies incorporated under the BVI Business Companies
Act, 2004 (British Virgin Islands) (each a BVI Company), but only where the offer will be made to, and received by, the relevant BVI
Company entirely outside of the British Virgin Islands.
This
prospectus has not been, and will not be, registered with the Financial Services Commission of the British Virgin Islands. No registered
prospectus has been or will be prepared in respect of the shares of common stock for the purposes of the Securities and Investment Business
Act, 2010, or SIBA or the Public Issuers Code of the British Virgin Islands.
The
shares of common stock may be offered to persons located in the British Virgin Islands who are “qualified investors” for
the purposes of SIBA. Qualified investors include (i) certain entities which are regulated by the Financial Services Commission in the
British Virgin Islands, including banks, insurance companies, licensees under SIBA and public, professional and private mutual funds;
(ii) a company, any securities of which are listed on a recognized exchange; and (iii) persons defined as “professional investors”
under SIBA, which is any person (a) whose ordinary business involves, whether for that person’s own account or the account of others,
the acquisition or disposal of property of the same kind as the property, or a substantial part of our property; or (b) who has signed
a declaration that he, whether individually or jointly with his spouse, has a net worth in excess of US$1,000,000 and that he consents
to being treated as a professional investor. The shares of common stock are not being, and may not be offered to the public or to any
person in the British Virgin Islands for purchase or subscription by or on behalf of the Company. The shares of common stock may be offered
to companies incorporated under the BVI Business Companies Act, 2004 (British Virgin Islands), but only where the offer will be made
to, and received by, the relevant BVI company entirely outside of the British Virgin Islands.
Canada.
The
common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined
in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients,
as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the
common stock must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable
securities laws.
Securities
legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus
supplement (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised
by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser
should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars
of these rights or consult with a legal advisor.
Pursuant
to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the
disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this Underwritten Offering.
Cayman
Islands
This
prospectus does not constitute a public offer of the shares of common stock, whether by way of sale or subscription, in the Cayman Islands.
Each underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, any
shares of common stock to the public in the Cayman Islands.
Dubai
International Financial Center
This
document relates to an exempt offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority. This document
is intended for distribution only to persons of a type specified in those rules. It must not be delivered to, or relied on by, any other
person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with exempt
offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it,
and has no responsibility for it. The shares of common stock which are the subject of the Underwritten Offering contemplated by
this document may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares of common stock offered
should conduct their own due diligence on the shares of common stock. If you do not understand the contents of this document, you should
consult an authorized financial advisor.
European
Economic Area
In
relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State),
each underwriter represents and agrees that with effect from and including the date on which the Prospectus Directive is implemented
in that Relevant Member State, it has not made and will not make an offer of shares of common stock which are the subject of the Underwritten
Offering contemplated by this prospectus to the public in that Relevant Member State other than:
● |
to
any legal entity which is a qualified investor as defined in the Prospectus Directive; |
|
|
● |
to
fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural
or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive,
subject to obtaining the prior consent of the representatives for any such offer; or |
|
|
● |
in
any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of common
stock shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive. |
For
the purposes of this provision, the expression an “offer to the public” in relation to any shares of common stock in any
Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the
shares of common stock to be offered so as to enable an investor to decide to purchase or subscribe the shares of common stock, as the
same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus
Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in
the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression “2010
PD Amending Directive” means Directive 2010/73/EU.
United
Kingdom
Each
of the underwriters severally represents warrants and agrees as follows:
● |
it
has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement
to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (FSMA) received
by it in connection with the issue or sale of the shares of common stock in circumstances in which Section 21 of the FSMA does not
apply to us; and |
● |
it
has complied with, and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to
the shares of common stock in, from or otherwise involving the United Kingdom. |
France
Neither
this prospectus nor any other offering material relating to the shares of common stock described in this prospectus has been submitted
to the clearance procedures of the Autorité des Marchés Financiers or of the competent authority of another member state
of the European Economic Area and notified to the Autorité des Marchés Financiers. The shares of common stock have not
been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this prospectus nor any
other offering material relating to the shares of common stock has been or will be:
● |
to
any legal entity which is a qualified investor as defined in the Prospectus Directive; |
|
|
● |
to
fewer than 100 or, if the relevant member state has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural
or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive,
subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by us for any such offer; or |
|
|
● |
in
any other circumstances falling within Article 3(2) of the Prospectus Directive; |
|
|
● |
released,
issued, distributed or caused to be released, issued or distributed to the public in France; or |
|
|
● |
used
in connection with any offer for subscription or sale of the shares of common stock to the public in France. |
Such
offers, sales and distributions will be made in France only:
● |
to
qualified investors (investisseurs qualifiés) and/or to a restricted circle of investors (cercle restreint d’investisseurs),
in each case investing for their own account, all as defined in, and in accordance with articles L.411-2, D.411-1, D.411-2, D.734-1,
D.744-1, D.754-1 and D.764-1 of the French Code monétaire et financier; |
|
|
● |
to
investment services providers authorized to engage in portfolio management on behalf of third parties; or |
|
|
● |
in
a transaction that, in accordance with article L.411-2-II-1°-or-2°-or 3° of the French Code monétaire et financier
and article 211-2 of the General Regulations (Règlement Général) of the Autorité des Marchés
Financiers, does not constitute a public offer (appel public à l’épargne). |
The
shares of common stock may be resold directly or indirectly, only in compliance with articles L.411-1, L.411-2, L.412-1 and L.621-8 through
L.621-8-3 of the French Code monétaire et financier.
Germany
This
prospectus does not constitute a Prospectus Directive-compliant prospectus in accordance with the German Securities Prospectus Act (Wertpapierprospektgesetz)
and does therefore not allow any public offering in the Federal Republic of Germany (“Germany”) or any other Relevant Member
State pursuant to § 17 and § 18 of the German Securities Prospectus Act. No action has been or will be taken in Germany that
would permit a public offering of the shares of common stock, or distribution of a prospectus or any other offering material relating
to the shares of common stock. In particular, no securities prospectus (Wertpapierprospekt) within the meaning of the German Securities
Prospectus Act or any other applicable laws of Germany, has been or will be published within Germany, nor has this prospectus been filed
with or approved by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht)
for publication within Germany.
Each
underwriter will represent, agree and undertake, (i) that it has not offered, sold or delivered and will not offer, sell or deliver the
shares of common stock within Germany other than in accordance with the German Securities Prospectus Act (Wertpapierprospektgesetz)
and any other applicable laws in Germany governing the issue, sale and offering of shares of common stock, and (ii) that it will distribute
in Germany any offering material relating to the shares of common stock only under circumstances that will result in compliance with
the applicable rules and regulations of Germany.
This
prospectus is strictly for use of the person who has received it. It may not be forwarded to other persons or published in Germany.
Hong
Kong
The
shares of common stock may not be offered or sold in Hong Kong by means of any document other than (i) to “professional investors”
as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance, or (ii) in other
circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of
Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document
relating to the shares of common stock may be issued or may be in the possession of any person for the purpose of issue, whether in Hong
Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except
if permitted to do so under the securities laws of Hong Kong) other than with respect to shares of common stock which are or are intended
to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and
Futures Ordinance and any rules made under that Ordinance.
Israel
This
prospectus does not constitute a prospectus under the Israeli Securities Law, 5728-1968, and has not been filed with or approved by the
Israel Securities Authority. In Israel, this prospectus is being distributed only to, and is directed only at, investors listed in the
first addendum, or the Addendum, to the Israeli Securities Law, consisting primarily of joint investment in trust funds, provident funds,
insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange, underwriters purchasing
for their own account, venture capital funds, entities with equity in excess of NIS 50 million and qualified individuals, each as defined
in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors. Qualified investors may be
required to submit written confirmation that they meet the criteria for one of the categories of investors set forth in the prospectus.
Italy
The
Underwritten Offering of shares of common stock has not been registered with the Commissione Nazionale per le Società
e la Borsa(“CONSOB”) pursuant to Italian securities legislation and, accordingly, no shares of common stock may be offered,
sold or delivered, nor copies of this prospectus or any other documents relating to the shares of common stock may not be distributed
in Italy except:
● |
to
“qualified investors”, as referred to in Article 100 of Legislative Decree No. 58 of 24 February 1998, as amended (the
“Decree No. 58”) and defined in Article 26, paragraph 1, letter d) of CONSOB Regulation No. 16190 of 29 October 2007,
as amended (“Regulation No. 16190”) pursuant to Article 34-ter, paragraph 1, letter b) of CONSOB Regulation No. 11971
of 14 May 1999, as amended (“Regulation No. 11971”); or |
|
|
● |
in
any other circumstances where an express exemption from compliance with the offer restrictions applies, as provided under Decree
No. 58 or Regulation No. 11971. |
Any
offer, sale or delivery of the shares of common stock or distribution of copies of this prospectus or any other documents relating to
the shares of common stock in the Republic of Italy must be:
● |
made
by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance
with Legislative Decree No. 385 of 1 September 1993, as amended (the “Banking Law”), Decree No. 58 and Regulation No.
16190 and any other applicable laws and regulations; |
|
|
● |
in
compliance with Article 129 of the Banking Law, and the implementing guidelines of the Bank of Italy, as amended; and |
|
|
● |
in
compliance with any other applicable notification requirement or limitation which may be imposed, from time to time, by CONSOB or
the Bank of Italy or other competent authority. |
Please
note that, in accordance with Article 100-bis of Decree No. 58, where no exemption from the rules on public offerings applies, the subsequent
distribution of the shares of common stock on the secondary market in Italy must be made in compliance with the public offer and the
prospectus requirement rules provided under Decree No. 58 and Regulation No. 11971.
Furthermore,
the shares of common stock which are initially offered and placed in Italy or abroad to qualified investors only but in the following
year are regularly (“sistematicamente”) distributed on the secondary market in Italy to non-qualified investors become
subject to the public offer and the prospectus requirement rules provided under Decree No. 58 and Regulation No. 11971. Failure to comply
with such rules may result in the sale of the shares of common stock being declared null and void and in the liability of the intermediary
transferring the shares of common stock for any damages suffered by such non-qualified investors.
Japan
The
shares of common stock have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25
of 1948, as amended) and accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese
Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance with
all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in
effect at the relevant time. For the purposes of this paragraph, “Japanese Person” shall mean any person resident in Japan,
including any corporation or other entity organized under the laws of Japan.
Kuwait
Unless
all necessary approvals from the Kuwait Ministry of Commerce and Industry required by Law No. 31/1990 “Regulating the Negotiation
of Securities and Establishment of Investment Funds,” its Executive Regulations and the various Ministerial Orders issued pursuant
thereto or in connection therewith, have been given in relation to the marketing and sale of the shares of common stock, these may not
be marketed, offered for sale, nor sold in the State of Kuwait. Neither this prospectus (including any related document), nor any of
the information contained therein is intended to lead to the conclusion of any contract of whatsoever nature within Kuwait.
PRC
This
prospectus has not been and will not be circulated or distributed in the PRC, and the shares of common stock may not be offered or sold,
and will not be offered or sold, directly or indirectly, to any resident of the PRC or to persons for re-offering or resale, directly
or indirectly, to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purpose of this paragraph,
the PRC does not include Taiwan and the Special Administrative Regions of Hong Kong and Macao.
Qatar
The
shares of common stock have not been and will not be offered, sold or delivered at any time, directly or indirectly, in the State of
Qatar (“Qatar”) in a manner that would constitute a public offering. This prospectus has not been reviewed or approved by
or registered with the Qatar Central Bank, the Qatar Exchange or the Qatar Financial Markets Authority. This prospectus is strictly private
and confidential, and may not be reproduced or used for any other purpose, nor provided to any person other than the recipient thereof.
Saudi
Arabia
This
prospectus may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Offers of Securities
Regulations issued by the Capital Market Authority. The Capital Market Authority does not make any representation as to the accuracy
or completeness of this prospectus, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance
upon, any part of this prospectus. Prospective purchasers of the securities offered hereby should conduct their own due diligence on
the accuracy of the information relating to the securities. If you do not understand the contents of this prospectus you should consult
an authorized financial adviser.
Singapore
This
prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other
document or material in connection with the offer or sale, or invitation for subscription or purchase, of shares of common stock may
not be circulated or distributed, nor may the shares of common stock be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to persons in Singapore other than
● |
to
an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), |
|
|
● |
to
a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified
in Section 275, of the SFA, or |
|
|
● |
otherwise
pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. |
Where
the shares of common stock are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
● |
a
corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments
and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or |
● |
a
trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust
is an individual who is an accredited investor, securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’
rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that
trust has acquired the shares of common stock pursuant to an offer made under Section 275 of the SFA except: |
|
(a) |
to
an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred
to in Section 275(1A) or Section 276(4)(i)(B) of the SFA; |
|
|
|
|
(b) |
where
no consideration is or will be given for the transfer; |
|
|
|
|
(c) |
where
the transfer is by operation of law; |
|
|
|
|
(d) |
as
specified in Section 276(7) of the SFA; or |
|
|
|
|
(e) |
as
specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore. |
Switzerland
This
document is not intended to constitute an offer or solicitation to purchase or invest in the shares of common stock described herein.
The shares of common stock may not be publicly offered, sold or advertised, directly or indirectly, in, into or from Switzerland and
will not be listed on the SIX Swiss Exchange or on any other exchange or regulated trading facility in Switzerland. Neither this document
nor any other offering or marketing material relating to the shares of common stock constitutes a prospectus as such term is understood
pursuant to article 652a or article 1156 of the Swiss Code of Obligations or a listing prospectus within the meaning of the listing rules
of the SIX Swiss Exchange or any other regulated trading facility in Switzerland, and neither this document nor any other offering or
marketing material relating to the shares of common stock may be publicly distributed or otherwise made publicly available in Switzerland.
Neither
this document nor any other offering or marketing material relating to the Underwritten Offering, nor the Company nor the shares
of common stock have been or will be filed with or approved by any Swiss regulatory authority. The shares of common stock are not subject
to the supervision by any Swiss regulatory authority, e.g., the Swiss Financial Markets Supervisory Authority FINMA (FINMA), and investors
in the shares of common stock will not benefit from protection or supervision by such authority.
Taiwan
The
shares of common stock have not been and will not be registered or filed with, or approved by, the Financial Supervisory Commission of
Taiwan pursuant to relevant securities laws and regulations and may not be offered or sold in Taiwan through a public offering or in
circumstances which constitute an offer within the meaning of the Securities and Exchange Act of Taiwan or relevant laws and regulations
that require a registration, filing or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has
been authorized to offer or sell the shares of common stock in Taiwan.
United
Arab Emirates
(Excluding
the Dubai International Financial Center)
The
shares of common stock have not been, and are not being, publicly offered, sold, promoted or advertised in the United Arab Emirates (“U.A.E.”)
other than in compliance with the laws of the U.A.E. Prospective investors in the Dubai International Financial Centre should have regard
to the specific selling restrictions on prospective investors in the Dubai International Financial Centre set out below.
The
information contained in this prospectus does not constitute a public offer of shares of common stock in the U.A.E. in accordance with
the Commercial Companies Law (Federal Law No. 8 of 1984 of the U.A.E., as amended) or otherwise and is not intended to be a public offer.
This prospectus has not been approved by or filed with the Central Bank of the United Arab Emirates, the Emirates Securities and Commodities
Authority or the Dubai Financial Services Authority, or DFSA. If you do not understand the contents of this prospectus, you should consult
an authorized financial adviser. This prospectus is provided for the benefit of the recipient only, and should not be delivered to, or
relied on by, any other person.
We
have not authorized and do not authorize the making of any offer of securities through any financial intermediary on our behalf, other
than offers made by the underwriters and their respective affiliates, with a view to the final placement of the securities as contemplated
in this document. Accordingly, no purchaser of the shares, other than the underwriters, is authorized to make any further offer of shares
on our behalf or on behalf of the underwriters.
No
action has been taken by us or the Representatives that would permit a public offering of the shares of common stock in any jurisdiction
outside the United States where action for that purpose is required. None of our shares of common stock included in the Underwritten
Offering may be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in
connection with the offer and sales of any such securities offered hereby be distributed or published in any jurisdiction except under
circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who receive this
prospectus are advised to inform themselves about and to observe any restrictions relating to the Underwritten Offering of shares of
common stock and the distribution of this prospectus. This prospectus is neither an offer to sell nor a solicitation of any offer to
buy the shares of common stock in any jurisdiction where that would not be permitted or legal.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
In
the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under the Securities Act is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions,
the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
LEGAL
MATTERS
The Crone Law Group P.C. has
opined on the validity of the shares being offered hereby. Bevilacqua PLLC is acting as counsel to the underwriters. Certain legal
matters as to PRC law will be passed upon for us by Beijing Dentons Law Offices, LLP (Chengdu) and by Jincheng Tongda & Neal Law
Firm for the underwriters. The Crone Law Group, P.C. may rely upon Beijing Dentons Law Offices, LLP (Chengdu) with respect to
matters governed by PRC law and Bevilacqua PLLC may rely upon Jincheng Tongda & Neal Law Firm with respect to matters governed by
PRC law.
EXPERTS
The
consolidated financial statements included in this prospectus and in the registration statement for the fiscal years ended December 31,
2022 and December 31, 2021 have been audited by B F Borgers CPA PC, an independent registered public accounting firm, and
are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting.
ADDITIONAL
INFORMATION
We
have filed with the SEC this registration statement on Form S-1 under the Securities Act with respect to the shares of common stock being
offered by this prospectus. This prospectus, which constitutes a part of this registration statement, does not contain all of the information
in this registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus,
you should refer to this registration statement and the exhibits filed as part of that document. Statements contained in this prospectus
as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you
to the copy of the contract or other document filed as an exhibit to this registration statement. Each of these statements is qualified
in all respects by this reference.
We are subject to the informational requirements of the Exchange Act and
file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings, including
this registration statement, over the Internet at the SEC’s website at http://www.sec.gov. You may also request a copy of these
filings, at no cost, by writing or telephoning us at: Wetouch Technology Inc., No. 29, Third Main Avenue, Shigao Town, Renshou County,
Meishan, Sichuan, China or (86) 028-37390666.
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER
30, 2023
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(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.
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
| |
| | |
| | |
| | |
| |
| |
Three-Month Period Ended | | |
Nine-Month Period Ended | |
| |
September 30, | | |
September 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
REVENUES | |
| | | |
| | | |
| | | |
| | |
Revenue from customers | |
| - | | |
| - | | |
| - | | |
| - | |
Revenues from related
parties | |
| - | | |
| - | | |
| - | | |
| - | |
REVENUES | |
$ | 11,123,605 | | |
$ | 11,623,018 | | |
$ | 37,331,498 | | |
$ | 35,370,499 | |
Total Revenues | |
| 11,123,605 | | |
| 11,623,018 | | |
| 37,331,498 | | |
| 35,370,499 | |
COST
OF REVENUES | |
| | | |
| | | |
| | | |
| | |
Cost of revenues from customers | |
| | | |
| | | |
| | | |
| | |
Cost of revenues related parties | |
| | | |
| | | |
| | | |
| | |
COST OF REVENUES | |
| (6,346,079 | ) | |
| (6,561,166 | ) | |
| (20,261,755 | ) | |
| (20,946,893 | ) |
Total
Cost of revenues | |
| (6,346,079) | | |
| (6,561,166) | | |
| (20,261,755) | | |
| (20,946,893) | |
GROSS PROFIT | |
| 4,777,526 | | |
| 5,061,852 | | |
| 17,069,743 | | |
| 14,423,606 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| (265,526 | ) | |
| (214,719 | ) | |
| (397,591 | ) | |
| (1,231,967 | ) |
General and administrative expenses | |
| (205,940 | ) | |
| (88,063 | ) | |
| (1,929,603 | ) | |
| (903,547 | ) |
Research and development expenses | |
| (20,580 | ) | |
| (20,737 | ) | |
| (61,849 | ) | |
| (65,307 | ) |
Share-based compensation | |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES | |
| (492,046 | ) | |
| (323,519 | ) | |
| (2,389,043 | ) | |
| (2,200,821 | ) |
Total operating expenses | |
| (492,046 | ) | |
| (323,519 | ) | |
| (2,389,043 | ) | |
| (2,200,821 | ) |
| |
| | | |
| | | |
| | | |
| | |
INCOME FROM OPERATIONS | |
| 4,285,480 | | |
| 4,738,333 | | |
| 14,680,700 | | |
| 12,222,785 | |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSES) | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 30,616 | | |
| 29,621 | | |
| 89,845 | | |
| 89,257 | |
Interest expense | |
| (139,876 | ) | |
| (58,692 | ) | |
| (211,383 | ) | |
| (172,255 | ) |
Government grant | |
| | | |
| | | |
| | | |
| | |
Gain on asset disposal | |
| | | |
| | | |
| | | |
| | |
Loss on conversion of convertible promissory notes payable | |
| | | |
| | | |
| | | |
| | |
Gain (loss) on changes in fair value of common stock purchase warrants liability | |
| (169,067 | ) | |
| (187,109 | ) | |
| (124,283 | ) | |
| 35,542 | |
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 | ) |
TOTAL OTHER INCOME LOSS, NET | |
| (278,327 | ) | |
| (216,180 | ) | |
| (245,821 | ) | |
| (47,456 | ) |
| |
| | | |
| | | |
| | | |
| | |
INCOME BEFORE INCOME TAX EXPENSE | |
| 4,007,153 | | |
| 4,522,153 | | |
| 14,434,879 | | |
| 12,175,329 | |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAX EXPENSE | |
| (1,148,185 | ) | |
| (1,232,629 | ) | |
| (4,109,679 | ) | |
| (3,392,587 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET INCOME | |
$ | 2,858,968 | | |
$ | 3,289,524 | | |
$ | 10,325,200 | | |
$ | 8,782,742 | |
| |
| | | |
| | | |
| | | |
| | |
OTHER COMPREHENSIVE INCOME (LOSS) | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| (674,209 | ) | |
| (4,195,353 | ) | |
| (7,560,136 | ) | |
| (7,597,937 | ) |
COMPREHENSIVE INCOME (LOSS) | |
$ | 2,184,759 | | |
$ | (905,829 | ) | |
$ | 2,765,064 | | |
$ | 1,184,805 | |
| |
| | | |
| | | |
| | | |
| | |
EARNINGS PER COMMON SHARE* | |
| | | |
| | | |
| | | |
| | |
Basic | * |
$ | 0.29 | | |
$ | 2.01 | | |
$ | 1.13 | | |
$ | 5.47 | |
Diluted | * |
$ | 0.29 | | |
$ | 2.01 | | |
$ | 1.13 | | |
$ | 5.12 | |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING* | |
| | | |
| | | |
| | | |
| | |
Basic | * |
| 9,712,404 | | |
| 1,639,881 | | |
| 9,135,132 | | |
| 1,604,328 | |
Diluted | * |
| 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) |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
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’ | |
| |
Shares | | |
Amount | | |
capital | | |
reserve | | |
Earnings | | |
loss | | |
equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
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 | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,858,968 | | |
| - | | |
| 2,858,968 | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (674,209 | ) | |
| (674,209 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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 | |
Balance | |
| 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 | |
Balance | |
| 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) |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
WETOUCH
TECHNOLODY INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
| | |
| |
| |
For the nine-months ended September 30, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Cash flows from operating activities | |
| | | |
| | |
Net income | |
$ | 10,325,200 | | |
$ | 8,782,742 | |
Adjustments to reconcile net income to cash provided by operating activities | |
| | | |
| | |
Bad debts reversal | |
| | | |
| | |
Inventory write-off | |
| | | |
| | |
Depreciation | |
| 9,465 | | |
| 12,494 | |
Asset disposal gain | |
| | | |
| | |
Loss of input VAT credits | |
| | | |
| | |
Share-based compensation | |
| | | |
| | |
Loss on convertible promissory notes payable | |
| | | |
| | |
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 | |
| (5,568,912 | ) | |
| (7,451,004 | ) |
Amounts due from related parties | |
| (98 | ) | |
| - | |
Inventories | |
| 199,566 | | |
| (194,529 | ) |
Prepaid expenses and other current assets | |
| 335,230 | | |
| 1,168,383 | |
Accounts payable | |
| 202,514 | | |
| 723,723 | |
Amounts due to related parties | |
| (1,665 | ) | |
| 7,366 | |
Income tax payable | |
| 1,171,069 | | |
| 1,208,810 | |
Accrued expenses and other current liabilities | |
| 2,187,200 | | |
| 506,706 | |
Deferred grants | |
| | | |
| | |
Net cash provided by operating activities | |
| 9,007,974 | | |
| 4,768,923 | |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Purchase of property and equipment | |
| | | |
| | |
Proceeds from assets disposal | |
| | | |
| | |
| |
| | | |
| | |
Net cash provided by investing activities | |
| - | | |
| - | |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
| |
| | | |
| | |
Proceeds from issuance of convertible promissory notes payable | |
| | | |
| | |
Payments of issue costs of convertible promissory note | |
| | | |
| | |
Proceeds from stock issuance of private placement | |
| 40,000,000 | | |
| - | |
Proceeds from interest-free advances from a third party | |
| | | |
| | |
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 | |
| (6,266,700 | ) | |
| (5,383,354 | ) |
Net increase (decrease) in cash | |
| 42,686,274 | | |
| (614,431 | ) |
Cash, beginning of period | |
| 51,250,505 | | |
| 46,163,704 | |
Cash, end of period | |
$ | 93,936,779 | | |
$ | 45,549,273 | |
Supplemental disclosures of cash flow information | |
| | | |
| | |
Interest paid | |
| | | |
| | |
Income taxes paid | |
$ | 2,938,610 | | |
$ | 2,181,273 | |
Non-cash investing activities | |
| | | |
| | |
Warrants issued to third parties in conjunction with debt issuance | |
| | | |
| | |
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.
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Unaudited)
NOTE
1 — BUSINESS DESCRIPTION
Wetouch
Technology Inc. (“Wetouch”, or the “Company”), formerly known as Gulf West Investment Properties, Inc., was originally
incorporated in August 1992, under the laws of the state of Nevada.
On
October 9, 2020, the 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 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 Wetouch”), is a holding company whose only asset, held through a subsidiary, is 100% 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 accordingly.
Corporate
History of BVI Wetouch
Wetouch
Holding Group Limited (“BVI Wetouch”) was incorporated under the laws of British Virgin Islands on August 14, 2020. It became
the holding 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 under the laws of Hong Kong Special
Administrative Region (“SAR”) on December 3, 2020. On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Vtouch.
Due to the fact that Hong Kong Wetouch and HK Wetouch are both under the same sole stockholder, the acquisition is accounted for under
common control.
In
June 2021, Hong Kong Wetouch completed its dissolution process pursuant to the minutes of its special shareholder meeting.
Sichuan
Wetouch Technology Co. Ltd. (“Sichuan Wetouch”) was formed on 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, Sichuan Wetouch was 100% held by HK Wetouch.
On
December 30, 2020, Sichuan Vtouch Technology Co., Ltd. (“Sichuan Vtouch”) was incorporated in Chengdu, Sichuan, under the
laws of the People’s Republic of China.
In
March 2021, pursuant to local 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.
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](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/image_002.jpg)
Note
2 — BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2022
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, 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 September 30, 2023, the results of operations and cash flows for the nine-month periods ended September
30, 2023 and 2022 have been made. However, the results of operations included in such financial statements may not necessarily be indicative
of annual results.
(g) Common
stock purchase warrants 871,677 256,957
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.
SCHEDULE
OF ESTIMATED USEFUL LIFE OF PROPERTY PLANT AND EQUIPMENT
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 2022 audited consolidated financial
statements. During the nine-month periods ended September 30, 2023, there were no significant changes made to Wetouch significant accounting
policies.
NOTE-3-
ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
SCHEDULE
OF ACCOUNTS RECEIVABLE
| |
September 30,
2023 | | |
December 31,
2022 | |
Accounts receivable | |
$ | 13,931,782 | | |
$ | 9,057,741 | |
Allowance for doubtful accounts | |
| - | | |
| - | |
Accounts receivable, net | |
$ | 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. |
NOTE
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 | |
Depreciation
expense was $2,294 and $2,340 for the three-month period ended September 30, 2023 and 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 received 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 RMB115.2 million ($15.8 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.
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 RMB300,000 ($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.
NOTE
6 – RELATED PARTY TRANSACTIONS
Amounts
due to a related party are as follows:
SCHEDULE
OF RELATED PARTY TRANSACTIONS
| |
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 | | |
- |
owns
94%
and 95%
of
NOTE
7 — INCOME TAXES
Wetouch
Wetouch
Technology Inc. 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 rate of 16.5%.
SCHEDULE
OF COMPONENTS OF THE INCOME TAX PROVISION
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, entitled it to a preferential income tax rate of 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 until
October 20, 2023.
On
March 30, 2023 an independent third party acquired all shares of Sichuan Wetouch.
.
Sichuan
Vtouch is entitled to 25% of income tax rate.
The
effective income tax rates for the nine-month periods ended September 30, 2023 and 2022 were 28.5% and 27.9%, respectively.
The
estimated effective income tax rate for the year ended December 31, 2023 would be similar to actual effective tax rate of the nine-month
periods ended September 30, 2023.
NOTE
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
| |
September
30,
2023 | | |
December
31,
2022 | |
Advance from customers | |
$ | 532,069 | | |
$ | 397,886 | |
Accrued payroll and employee benefits | |
| 82,015 | | |
| 89,359 | |
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 | |
$ | 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. |
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 recorded as
deferred charges and included in the other current assets on the consolidated balance 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 16%.
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 Uplist 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 common stock at an effective price
per share lower than the conversion 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 Uplist Offering). If the Company prepays the Notes prior to the Maturity Date, the Company
shall pay a 10% prepayment penalty.
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.
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 | |
(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.
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
11- SHARE BASED COMPENSATION
The
Company applied ASC 718 and related interpretations in accounting for measuring the cost of share-based compensation over the period
during which the consultants are required to provide services in exchange for the issued shares. The fair value of above award was estimated
at the grant date using Black-Scholes model for pricing the share compensation expenses.
On
December 22, 2020, the Board of Directors of the Company authorized the issuance of an aggregate of 5,181shares and 10,518 warrants to
The Crone Law Group, P.C. or its designees for legal services that had been rendered. The five-year warrants are exercisable at one cent
per share.
The
shares of 5,181 were vested on December 22, 2020 and 6,211 warrant shares were 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%, volatility of 43.5% and an average interest rate
of 0.11%.
On
January 1, 2021, the Board of Directors of the Company authorized the issuance of an aggregate of 15,541 shares and 31,554 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 35,861 warrants 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
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.
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.
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.
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.
For
the three-month periods ended September 30, 2023 and 2022, five customers accounted for 20.5%, 17.4%, 15.7%, 15.6% and 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 20.5%, 15.9%, 15.6%, 14.5%, 12.3% and 10.2%, respectively, of the Company’s revenue.
And
the Company’s top ten customers aggregately accounted for 99.8% and 99.1% of the total revenue for the three-month periods ended
September 30, 2023 and 2022, and 99.6% and 99.2% for the nine-month periods ended September 30, 2023 and 2022.
As
of September 30, 2023, two customers accounted for 26.7%, and 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 23.0% (two suppliers) and 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 September
30, 2023 and 2022, respectively.
NOTE
13 — COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
From
time to time, the Company and its affiliates are parties to various legal actions arising in the ordinary course of business. Although
Sichuan Wetouch and Hong Kong Wetouch, the previous subsidiaries of the Company, and 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 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 September 30, 2023, the Company
has 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 RMB5.0 million (equivalent to US$0.7 million) to be paid by the end of 2023.
NOTE
12. WEIGHTED AVERAGE NUMBER OF SHARES 21.2
NOTE
14 — REVENUES
The
Company’s geographical revenue information is set forth below:
SCHEDULE
OF GEOGRAPHICAL REVENUE INFORMATION
| |
| | |
| | |
| | |
| |
| |
Three-Month Period Ended September 30, | | |
Nine-Month Period Ended September 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
US$ | | |
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.
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(AUDITED)
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the shareholders and the board of directors of Wetouch Technology Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Wetouch Technology Inc. (the “Company”) as of December 31, 2022
and 2021, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows
for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the each of the two years in the period
ended December 31, 2022, in conformity with accounting principles generally accepted in the United States.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that
was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material
to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication
of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are
not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Legal
Proceedings over Guarantee Obligations
As
described in Note 13 to the financial statements, management disclosed legal proceedings over the Company’s guarantee obligations
where liability is not probable or the amount of the liability is not estimable, or both, if management believes there is at least a
reasonable possibility that the Company has fulfilled the guarantee obligation or a loss may be incurred when the guarantee obligations
were not discharged.
Our
principal considerations to determine that the legal proceedings over guarantee obligations is a critical audit matter as there was significant
judgment by management when assessing the likelihood of a loss being incurred and when estimating the loss or range of loss for each
claim, which in turn led to significant auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s
assessment of the liabilities and disclosures related to legal proceedings on guarantee obligations.
Addressing
the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial
statements. These procedures included, among others, obtaining and evaluating the letters of audit inquiry with external legal counsel,
reviewing public accessible information regarding the Company’s litigation cases, evaluating the reasonableness of management’s
assessment regarding whether an unfavorable outcome is reasonably possible or probable and reasonably estimable, and evaluating the sufficiency
of the Company’s disclosures related to legal proceedings over guarantee obligations.
/s/
B F Borgers CPA PC |
|
|
|
We
have served as the Company’s auditor since 2019. |
|
|
|
Lakewood,
Colorado |
|
April
17, 2023 |
|
PCAOB
ID: 5041 |
|
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
| |
| | |
| |
| |
As of December 31, | | |
As of December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
Cash | |
$ | 51,250,505 | | |
$ | 46,163,704 | |
Accounts receivable, net | |
| 9,057,741 | | |
| 7,991,037 | |
Inventories | |
| 423,276 | | |
| 244,381 | |
Prepaid expenses and other current assets | |
| 1,450,620 | | |
| 2,445,894 | |
TOTAL CURRENT ASSETS | |
| 62,182,142 | | |
| 56,845,016 | |
| |
| | | |
| | |
Property, plant and equipment, net | |
| 10,923,610 | | |
| 11,833,302 | |
TOTAL ASSETS | |
$ | 73,105,752 | | |
$ | 68,678,318 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | 1,383,094 | | |
$ | 800,586 | |
Loan from a third party | |
| 385,791 | | |
| - | |
Due to related parties | |
| 1,665 | | |
| 34,669 | |
Income tax payable | |
| 22,152 | | |
| 65,463 | |
Accrued expenses and other current liabilities | |
| 944,624 | | |
| 310,407 | |
Convertible promissory notes payable | |
| 1,277,282 | | |
| 2,030,550 | |
TOTAL CURRENT LIABILITIES | |
| 4,014,608 | | |
| 3,241,675 | |
| |
| | | |
| | |
Common stock purchase warrants liability | |
| 256,957 | | |
| 1,128,635 | |
TOTAL LIABILITIES | |
$ | 4,271,565 | | |
$ | 4,370,310 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES (Note 13) | |
| - | | |
| | |
STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Common stock, $0.001
par value, 15,000,000 shares
authorized, 1,680,248 and 1,590,576
issued and outstanding as of December 31, 2022 and 2021, respectively* | |
$ | 1,680 | | |
$ | 1,591 | |
Additional paid in capital | |
| 3,402,178 | | |
| 2,363,842 | |
Statutory reserve | |
| 6,040,961 | | |
| 5,067,243 | |
Retained earnings | |
| 62,366,892 | | |
| 54,610,164 | |
Accumulated other comprehensive income | |
| (2,977,524 | ) | |
| 2,265,168 | |
TOTAL STOCKHOLDERS’ EQUITY | |
| 68,834,187 | | |
| 64,308,008 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 73,105,752 | | |
$ | 68,678,318 | |
Retrospectively
restated for effect of reverse stock split (1-for-20 )
The
accompanying notes are an integral part of these consolidated financial statements.
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Audited)
| |
| | |
| |
| |
For the years ended December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
REVENUES | |
| | | |
| | |
Revenue from customers | |
$ | 37,923,112 | | |
$ | 40,687,624 | |
Revenues from related parties | |
| - | | |
| 97,850 | |
Total Revenues | |
| 37,923,112 | | |
| 40,785,474 | |
COST OF REVENUES | |
| | | |
| | |
Cost of revenues from customers | |
| (23,872,632 | ) | |
| (22,256,642 | ) |
Cost of revenues related parties | |
| - | | |
| (97,850 | ) |
Total Cost of revenues | |
| (23,872,632) | | |
| (22,354,492 | ) |
GROSS PROFIT | |
| 14,050,480 | | |
| 18,430,982 | |
| |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | |
Selling expenses | |
| (1,288,467 | ) | |
| (630,503 | ) |
General and administrative expenses | |
| (1,262,093 | ) | |
| (1,937,374 | ) |
Research and development expenses | |
| (85,251 | ) | |
| (89,477 | ) |
Share-based compensation | |
| - | | |
| (3,149,106 | ) |
Total operating expenses | |
| (2,635,811 | ) | |
| (5,806,460 | ) |
| |
| | | |
| | |
INCOME FROM OPERATIONS | |
| 11,414,669 | | |
| 12,624,522 | |
| |
| | | |
| | |
OTHER INCOME (EXPENSES) | |
| | | |
| | |
| |
| | | |
| | |
Interest income | |
| 118,714 | | |
| 95,534 | |
Interest expense | |
| (224,885 | ) | |
| (27,450 | ) |
Government grant | |
| - | | |
| 695,055 | |
Gain on asset disposal | |
| - | | |
| 7,648,423 | |
Loss on conversion of convertible promissory notes payable | |
| (96,927 | ) | |
| - | |
Gain on changes in fair value of common stock purchase warrants liability | |
| 871,677 | | |
| 759,471 | |
TOTAL OTHER INCOME, NET | |
| 668,579 | | |
| 9,171,033 | |
| |
| | | |
| | |
INCOME BEFORE INCOME TAX EXPENSE | |
| 12,083,248 | | |
| 21,795,555 | |
| |
| | | |
| | |
INCOME TAX EXPENSE | |
| (3,352,802 | ) | |
| (4,409,589 | ) |
| |
| | | |
| | |
NET INCOME | |
$ | 8,730,446 | | |
$ | 17,385,966 | |
| |
| | | |
| | |
OTHER COMPREHENSIVE INCOME (LOSS) | |
| | | |
| | |
Foreign currency translation adjustment | |
| (5,242,692 | ) | |
| 1,307,260 | |
COMPREHENSIVE INCOME | |
$ | 3,487,754 | | |
$ | 18,693,226 | |
| |
| | | |
| | |
EARNINGS PER COMMON SHARE* | |
| | | |
| | |
Basic | |
$ | 5.38 | | |
$ | 10.93 | |
Diluted | |
$ | 4.73 | | |
$ | 10.65 | |
| |
| | | |
| | |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING* | |
| | | |
| | |
Basic | |
| 1,620,511 | | |
| 1,590,576 | |
Diluted | |
| 1,843,767 | | |
| 1,632,658 | |
Retrospectively restated for effect of reverse stock split (1-for-20 )
The
accompanying notes are an integral part of these consolidated financial statements.
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
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* | |
| 1,575,035 | | |
$ | 1,575 | | |
$ | 1,102,858 | | |
$ | 3,062,159 | | |
$ | 39,229,282 | | |
$ | 957,908 | | |
$ | 44,353,782 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Appropriation to statutory reserve | |
| - | | |
| - | | |
| | | |
| 2,005,084 | | |
| (2,005,084 | ) | |
| - | | |
| - | |
Share-based compensation | |
| 15,541 | | |
| 16 | | |
| 3,149,090 | | |
| - | | |
| | | |
| - | | |
| 3,149,106 | |
Warrants issued to third parties in conjunction with debt issuance | |
| | | |
| | | |
| (1,888,106 | ) | |
| | | |
| | | |
| | | |
| (1,888,106 | ) |
Net income | |
| | | |
| | | |
| | | |
| | | |
| 17,385,966 | | |
| | | |
| 17,385,966 | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,307,260 | | |
| 1,307,260 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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 | |
| |
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 | |
Balance | |
| 1,590,576 | | |
$ | 1,591 | | |
$ | 2,363,842 | | |
$ | 5,067,243 | | |
$ | 54,610,164 | | |
$ | 2,265,168 | | |
$ | 64,308,008 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Appropriation to statutory reserve | |
| - | | |
| - | | |
| | | |
| 973,718 | | |
| (973,718 | ) | |
| - | | |
| - | |
Exercise of warrants issued in conjunction with legal services in 2020 | |
| 6,211 | | |
| 6 | | |
| (6 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
Exercise of warrants issued to third parties in conjunction with debt issuance in 2021 | |
| 14,233 | | |
| 14 | | |
| (14 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
Stock issuance for convertible promissory notes payable | |
| 69,228 | | |
| 69 | | |
| 1,038,356 | | |
| - | | |
| - | | |
| - | | |
| 1,038,425 | |
Net income | |
| | | |
| | | |
| | | |
| | | |
| 8,730,446 | | |
| - | | |
| 8,730,446 | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (5,242,692 | ) | |
| (5,242,692 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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 | |
Balance | |
| 1,680,248 | | |
$ | 1,680 | | |
$ | 3,402,178 | | |
$ | 6,040,961 | | |
$ | 62,366,892 | | |
$ | (2,977,524 | ) | |
$ | 68,834,187 | |
Retrospectively restated for effect of reverse stock split (1-for-20 )
The
accompanying notes are an integral part of these consolidated financial statements.
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
| | |
| |
| |
For the years ended December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Cash flows from operating activities | |
| | | |
| | |
Net income | |
$ | 8,730,446 | | |
$ | 17,385,966 | |
Adjustments to reconcile net income to cash provided by operating activities | |
| | | |
| | |
Bad debts reversal | |
| - | | |
| (76,492 | ) |
Inventory write-off | |
| 74,100 | | |
| - | |
Depreciation and amortization | |
| 9,891 | | |
| 381,167 | |
Asset disposal gain | |
| - | | |
| (7,648,423 | ) |
Loss of input VAT credits | |
| - | | |
| 356,073 | |
Share-based compensation | |
| - | | |
| 3,149,106 | |
Loss on convertible promissory notes payable | |
| 96,927 | | |
| - | |
Amortization of discounts and issuance cost of the notes | |
| 148,368 | | |
| 8,550 | |
Gain on changes in fair value of common stock purchase warrants liability | |
| (871,677 | ) | |
| (759,471 | ) |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (1,497,237 | ) | |
| 4,994,861 | |
Amounts due from related parties | |
| - | | |
| 83,849 | |
Inventories | |
| (197,453 | ) | |
| 190,490 | |
Prepaid expenses and other current assets | |
| 853,426 | | |
| (2,258,602 | ) |
Accounts payable | |
| 637,372 | | |
| (167,186 | ) |
Amounts due to related parties | |
| (18,055 | ) | |
| (575,329 | ) |
Income tax payable | |
| (41,068 | ) | |
| (50,424 | ) |
Accrued expenses and other current liabilities | |
| 661,203 | | |
| (233,882 | ) |
Deferred grants | |
| - | | |
| (728,818 | ) |
Net cash provided by operating activities | |
| 8,586,243 | | |
| 14,051,434 | |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Purchase of property and equipment | |
| - | | |
| (11,695,448 | ) |
Proceeds from assets disposal | |
| - | | |
| 17,859,076 | |
Net cash provided by investing activities | |
| - | | |
| 6,163,628 | |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Proceeds from issuance of convertible promissory notes payable | |
| - | | |
| 2,025,000 | |
Payments of issue costs of convertible promissory note | |
| - | | |
| (162,000 | ) |
Repayments of convertible promissory notes payable | |
| (1,038,426 | ) | |
| - | |
Proceeds from interest-free advances from a third party | |
| 385,791 | | |
| - | |
Net cash provided by (used in) financing activities | |
| (652,635 | ) | |
| 1,863,000 | |
| |
| | | |
| | |
Effect of changes of foreign exchange rates on cash | |
| (2,846,807 | ) | |
| 121,781 | |
Net increase in cash | |
| 5,086,801 | | |
| 22,199,843 | |
Cash, beginning of year | |
| 46,163,704 | | |
| 23,963,861 | |
Cash, end of year | |
$ | 51,250,505 | | |
$ | 46,163,704 | |
Supplemental disclosures of cash flow information | |
| | |
| |
Interest paid | |
$ | 10,000 | | |
$ | - | |
Income taxes paid | |
$ | 3,391,137 | | |
$ | 3,774,917 | |
| |
| | | |
| | |
Non-cash investing activities | |
| | | |
| | |
Warrants issued to third parties in conjunction with debt issuance | |
$ | - | | |
$ | 1,888,106 | |
Non-cash financing activities | |
| | | |
| | |
Cashless stock issuance for convertible promissory notes payable | |
$ | 284,654 | | |
$ | - | |
The
accompanying notes are an integral part of these consolidated financial statements.
WETOUCH
TECHNOLOGY INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 — BUSINESS DESCRIPTION
Business
Wetouch
Technology Inc. (“Wetouch”, or the “Company”), formerly known as Gulf West Investment Properties, Inc., was originally
incorporated in August 1992, under the laws of the state of Nevada.
On
October 9, 2020, the 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 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 Wetouch”), is a holding company whose only asset, held through a subsidiary, is 100% 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.
Corporate
History of BVI Wetouch
Wetouch
Holding Group Limited (“BVI Wetouch”) was incorporated under the laws of British Virgin Islands on August 14, 2020. It became
the holding 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 under the laws of Hong Kong Special
Administrative Region (“SAR”) on December 3, 2020. On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Vtouch.
Due to the fact that Hong Kong Wetouch and HK Wetouch are both under the same sole stockholder, the acquisition is accounted for under
common control.
In
June, 2021, Hong Kong Wetouch completed its dissolution process pursuant to the minutes of its special shareholder meeting.
Sichuan
Wetouch Technology Co. Ltd. (“Sichuan Wetouch”) was formed on 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, Sichuan Wetouch was 100% held by HK Wetouch.
On
December 30, 2020, Sichuan Vtouch Technology Co., Ltd. (“Sichuan Vtouch”) was incorporated in Chengdu, Sichuan, under the
laws of the People’s Republic of China.
In
March 2021, pursuant to local PRC government guidelines on local environmental issues and the national overall plan, Sichuan Wetouch
was under the government directed relocation order, and started its dissolution process which is estimated to be completed by the end
of 2023. Sichuan Vtouch took over the operating business of Sichuan Wetouch.
As
a result of the above restructuring, HK Wetouch became the sole shareholder of Sichuan Vtouch.
Note
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). The accompanying consolidated financial statements include the financial statements of Wetouch and its wholly
owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
(b)
Uses of estimates
In
preparing the consolidated financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date
of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the
allowance for estimated uncollectible receivables, fair values of financial instruments,
inventory valuations, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets, provision
necessary for contingent liabilities, revenue recognition and realization of deferred tax assets. Actual results could differ from those
estimates.
(c)
Cash and cash equivalents
Cash
includes currency on hand and deposits held by banks that can be added or withdrawn without limitation.
(d)
Accounts receivables, net
Accounts
receivables are presented net of allowance for doubtful accounts. The Company determines the adequacy of reserves for doubtful accounts
based on individual account analysis and historical collection trend. The Company establishes a provision for doubtful receivables when
there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best
estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. Actual amounts received
may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off
against the allowance for doubtful accounts after management has determined that the collection is not probable.
(e)
Inventory
Inventory
consists of raw materials, work-in-process and finished goods and is stated at the lower of cost or net realizable value. Cost is determined
using a weighted average. For work-in-process and manufactured inventories, cost consists of raw materials, direct labor and an allocated
portion of the Company’s production overhead. The Company writes down excess and obsolete inventory to its estimated net realizable
value based upon assumptions about future demand and market conditions. For finished goods and work-in-process, if the estimated net
realizable value for an inventory item, which is the estimated selling price in the ordinary course of business, less reasonably predicable
costs to completion and disposal, is lower than its cost, the specific inventory item is written down to its estimated net realizable
value. Net realizable value for raw materials is based on replacement cost. Provisions for inventory write-downs are included in the
cost of revenues in the consolidated statements of operations. Inventories are carried at this lower cost basis until sold or scrapped.
$74,100 and nil inventory write-off was recorded for the years ended December 31, 2022 and 2021, respectively.
(f)
Convertible Promissory Notes
The
Company accounts for its convertible promissory notes according to guidance of ASU 2020-06, “Debt—Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for convertible instruments
by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required
to be accounted for as derivatives under Topic 815.
We
analyze the convertible notes for the existence of a beneficial conversion feature. the Company considered the three characteristics
of a derivative instrument listed in ASC 815-10-15-83: (i) having one or more underlyings and one or more notional amounts or payment
provisions or both; (ii) requiring no initial net investment; (iii) permitting net settlement;
Since
the Company’s notes have fixed interest rate, specified notional principal and settlement date, which no other events would affect
specified settlement, and the Company received net proceeds after issuance costs and discount, which the Company recorded as the net
proceeds or net settled investment, the management assessed that the Notes did not do not meet the definition of a derivative instruments
and an embedded feature would not be bifurcated. The discounts on the convertible notes, are amortized to interest expense, using the
effective interest method, over the terms of the related convertible notes.
(g)
Common stock purchase warrants
The
Company also analyzed the Warrants in accordance with ASC 815, to determine whether the Warrants meet the definition of a derivative
and, if so, whether the Warrants meet the scope exception of ASC 815-40, which is that contracts issued or held by the reporting entity
that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative
instruments for purposes of ASC 815-40.
The
Company concluded that the Warrants issued in November and December 2021 financing should be treated as a derivative liability because
the Warrants are entitled to a price adjustment provision to allow the exercise price to be increased or reduced in the event the Company
issues or sells any additional shares of common stock at a price per share more or less than the then-applicable exercise price or without
consideration, which is typically referred to as a “Down-round protection” or “anti-dilution” provision. According
to ASC 815-40, the “Down-round protection” provision is not considered to be an input to the fair value of a fixed-for-fixed
option on equity shares which leads the Warrants to fail to be qualified as indexed to the Company’s own stock and then to fail
to meet the scope exceptions of ASC 815. Therefore, the Company accounted for the Warrants as derivative liabilities under ASC 815. Pursuant
to ASC 815, derivatives are measured at fair value and re-measured at fair value with changes in fair value recorded in earnings at each
reporting period.
The
Company used a black-scholes-pricing model to estimate the fair values of common stock purchase warrants at the balance sheet dates.
As of December 31, 2022 and 2021, the Company recorded $256,957 and $1,128,635 common stock purchase warrants liability, respectively,
and $871,677 and $759,471 gain on changes of fair value of common stock purchase liability warrants for the year ended December 31, 2022
and 2021, respectively.
(h)
Fair value of financial instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The
hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of
inputs used to measure fair value are as follows:
|
● |
Level
1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in
active markets. |
|
● |
Level
2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable
and inputs derived from or corroborated by observable market data. |
|
● |
Level
3 — inputs to the valuation methodology are unobservable. |
Unless
otherwise disclosed, the fair value of the Company’s financial instruments, including cash, accounts receivable, prepaid expenses
and other current assets, accounts payable, short-term bank loans, accrued expenses and other current liabilities, taxes payable and
due to related parties, common stock purchase warrants liability, approximate the fair value of the respective assets and liabilities
as of December 31, 2022 and 2021 based upon the nature of the assets and liabilities.
(i)
Property, plant and equipment, net
Property,
plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and
equipment is provided using the straight-line method over their expected useful lives, as follows:
SCHEDULE
OF ESTIMATED USEFUL LIFE OF PROPERTY PLANT AND EQUIPMENT
| |
Useful life |
Buildings | |
20 years |
Machinery and equipment | |
10 years |
Office and electric equipment | |
3 years |
Expenditures
for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures
for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated
depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated
statements of income and other comprehensive income in other income or expenses.
(l)
Impairment of long-lived Assets
Long-lived
assets, such as property, plant and equipment, land use rights, are reviewed for impairment when events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and used
is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected
to be generated by the asset or asset group. If the carrying value of an asset or asset group exceeds its estimated undiscounted future
cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value of the asset or
asset group. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values
and third party independent appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or
fair value less costs to sell, and are no longer depreciated. There were nil impairment of intangible assets recognized for the years
ended December 31, 2022 and 2021.
(m)
Foreign Currency Translation
The
Company uses US dollars as the reporting currency. The Company’s subsidiary HK Wetouch’s functional currency for HK Wetouch
is Hong Kong dollar. The functional currency of Sichuan Wetouch is the Chinese Yuan (“RMB”). The Company’s consolidated
financial statements have been translated into US$. Assets and liabilities accounts are translated using the exchange rate at each reporting
period end date. Equity accounts are translated at historical rates. Income and expense accounts are translated at the average rate of
exchange during the reporting period. The resulting translation adjustments are reported under other comprehensive income (loss). Gains
and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.
The
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
The
following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
SCHEDULE
OF CURRENT EXCHANGE RATES
| |
| December 31, 2022 | | |
| December 31, 2021 | |
Year-end spot rate | |
| US$1=RMB 6.8972 | | |
| US$1=RMB 6.3726 | |
Average rate | |
| US$1=RMB 6.7312 | | |
| US$1=RMB 6.4505 | |
(n)
Revenue recognition
The
Company adopted Accounting Standards Codification (“ASC”) 606 using the modified retrospective approach. The adoption of
this standard did not have a material impact on the Company’s consolidated financial statements. Therefore, no adjustments to opening
retained earnings were necessary.
ASC
606, Revenue from Contracts with customers, establishes principles for reporting information about the nature, amount, timing and uncertainty
of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires
an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration
that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
ASC
606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company
(i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction
price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate
the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies
the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result
in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its
existing customer contracts and current accounting policies and practices to identify differences that would result from applying the
new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control
and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and
pattern of revenue recognition for its current revenue streams.
In
accordance with ASC 606, the Company recognizes revenue when it transfers its goods and services to customers in an amount that reflects
the consideration to which the Company expects to be entitled in such exchange. The Company accounts for the revenue generated from sales
of its products primarily to its customers in PRC and overseas, as the Company is acting as a principal in these transactions, is subject
to inventory risk, has latitude in establishing prices, and is responsible for fulfilling the promise to provide customers the specified
goods, which the Company has control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits.
All of the Company’s contracts have one single performance obligation as the promise is to transfer the individual goods to customers,
and there is no separately identifiable other promises in the contracts. The Company’s revenue streams are recognized at a point
in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company’s
products are sold with no right of return and the Company does not provide other credits or sales incentive to customers. The Company’s
sales are net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in respect
of product sales.
Contract
Assets and Liabilities
Payment
terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’ credit
quality. Contract assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment
has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing when an order
is placed and when shipment or delivery occurs. As of December 31, 2022 and 2021, other than accounts receivable and advances from customers,
the Company had no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance
sheet. Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer
of control, are recognized in selling, general and administrative expense when incurred.
Disaggregation
of Revenues
The
Company disaggregates its revenue from contracts by geography, as the Company believes it best depicts how the nature, amount, timing
and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the
years ended December 31, 2022 and 2021 are disclosed in Note 14 to the financial statements.
(o)
Selling, General and Administrative Expenses
Selling
expenses represents primarily costs of payroll, benefits, commissions for sales representatives and advertising expenses. General and
administrative expenses represents primarily payroll and benefits costs for administrative employees, rent and operating costs of office
premises, depreciation and amortization of office facilities, professional fees and other administrative expenses.
(p)
Research and Development Expense
Research
and development costs are expensed as incurred.
(q)
Share-Based Compensation
The
Company awards share options and other equity-based instruments to its employees, directors and third party service providers (collectively
“share-based payments”). Compensation cost related to such awards is measured based on the fair value of the instrument on
the grant date. The Company recognizes the compensation cost over the period the employee is required to provide service in exchange
for the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect the expected forfeiture prior
to vesting. When no future services are required to be performed by the employee in exchange for an award of equity instruments, and
if such award does not contain a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes
compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite
service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals
the portion of the grant-date value of such award that is vested at that date.
(r)
Government grant
The
Company follows other authoritative accounting guidance since there is no clear guidance with regard to government grants. Government
grants are recognized at fair value where there is reasonable assurance that the grant will be received and all grant conditions will
be met. Grants relating to expense items are recognized as income over the periods necessary to match the grant to the costs it is compensating.
Grants relating to assets are credited to deferred income at fair value and are credited to income over the expected useful life of the
asset on a straight-line basis.
(s)
Income taxes
The
Company accounts for income taxes in accordance with the asset and liability method. Deferred taxes are recognized for the future tax
consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes
and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established,
as needed, to reduce the amount of deferred tax assets if it is considered more-likely-than-not that some portion or all of the deferred
tax assets will not be realized.
The
Company recognizes the effect of uncertain income tax positions only if those positions are more-likely-than-not of being sustained.
Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition
or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to record interest and
penalties related to uncertain tax positions as a component of income tax expense. There were no such interest or penalty for the years
ended December 31, 2022 and 2021.
On
December 22, 2017 the Tax Cut and Jobs Act of 2017 (“the Tax Act”) was signed into law, which among other effects, reduces
the U.S. federal corporate income tax rate to 21% from 34% (or 35% in certain cases) beginning in 2018, and requires companies to pay
a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years. No tax was due
under this provision. The Tax Act also makes the receipt of future non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S.
companies and creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to the parent’s deductions for payments
to the subsidiaries.
(t)
Value added tax (“VAT”)
Sales
revenue represents the invoiced value of goods, net of VAT. The VAT is based on gross sales price. Since April 1, 2019, VAT rate was
lowered from 16% to 13%. The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of
producing or acquiring its finished products. The Company recorded a VAT payable or recoverable net of VAT payments in the accompanying
consolidated financial statements.
For
export sales, VAT is not imposed on gross sales price, but the VAT related to purchasing raw materials is refunded after the export is
completed.
(u)
Earnings per Share
The
Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”).
ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided
by the weighted average common shares outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential
common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented,
or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or
decrease loss per share) are excluded from the calculation of diluted EPS. As of December 31, 2022 and 2021, warrants were included for
the dilutive EPS calculation, respectively.
(v)
Comprehensive income (loss)
Comprehensive
income (loss) consists of two components, net income and other comprehensive income (loss). The foreign currency translation gain or
loss resulting from translation of the financial statements expressed in RMB to US$ is reported in other comprehensive income (loss)
in the consolidated statements of income and comprehensive income.
(w)
Recent Accounting Pronouncements
The
Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews
new accounting standards that are issued.
In
August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments
by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting
models results in fewer embedded conversion features being separately recognized from the host contract as compared with current U.S.
GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are
not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception
from derivative accounting, and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded
as additional paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s
own equity to reduce form-over-substance-based accounting conclusions. For public business entities, the amendments in ASU 2020-06 are
effective for public entities which meet the definition of a smaller reporting company are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2023, including
interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning
after December 15, 2020, including interim periods within those fiscal years. The Company adopted
ASU 2020-06 effective January 1, 2021.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the
accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate
credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities
and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The
pronouncement will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 utilizing the modified
retrospective transition method. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated
financial statements.
In
December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The
amendment simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes.
It also clarifies certain aspects of the existing guidance to promote more consistent application, among other things. The guidance is
effective for interim and annual reporting periods beginning within 2021 with early adoption permitted.
In
October 2021, the FASB issued ASU No. 2021-08, which will require companies to apply the definition of a performance obligation under
ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers
that are acquired in a business combination. Under current U.S. GAAP, an acquirer generally recognizes assets acquired and liabilities
assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers,
at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities
on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU No. 2021-08 is effective
for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of
this ASU on its financial statements and the effects will be based upon the contract assets and liabilities acquired in the future.
From
time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated
through issuance of ASUs. Unless otherwise discussed, the Company believes that the recently issued guidance, whether adopted or to be
adopted in the future, is not expected to have a material impact on its consolidated financial statements upon adoption.
NOTE-3-
ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
SCHEDULE
OF ACCOUNTS RECEIVABLE
| |
December 31,
2022 | | |
December 31 2021 | |
Accounts receivable | |
$ | 9,057,741 | | |
$ | 7,991,037 | |
Allowance for doubtful accounts | |
| - | | |
| - | |
Accounts receivable, net | |
$ | 9,057,741 | | |
$ | 7,991,037 | |
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 consists of the following:
SCHEDULE
OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
December 31,
2022 | | |
December 31,
2021 | |
Advance to suppliers | |
$ | 333,920 | | |
$ | 244,758 | |
VAT input credits | |
| 355,482 | | |
| 307,575 | |
Issue cost related to convertible promissory notes | |
| 81,614 | | |
| 159,000 | |
Deferred marketing expenses | |
| - | | |
| 1,000,000 | |
Prepayment for land use right/ (i) | (i) |
| 569,105 | | |
| 615,955 | |
Security deposit (ii) | (ii) |
| 56,979 | | |
| 61,670 | |
Others receivable (iii) | (iii) |
| 53,520 | | |
| 56,936 | |
Prepaid expenses and other current assets | |
$ | 1,450,620 | | |
$ | 2,445,894 | |
(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 $569,105) 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 $56,979) 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 end of 2023. |
(i) | | Other receivables
are mainly employee advances, and prepaid expenses. |
NOTE
5— PROPERTY, PLANT AND EQUIPMENT, NET
SCHEDULE
OF PROPERTY , PLANT AND EQUIPMENT
| |
December 31,
2022 | | |
December 31,
2021 | |
Buildings | |
$ | 12,487 | | |
$ | 13,514 | |
Vehicles | |
| 42,453 | | |
| 45,948 | |
Construction in progress | |
| 10,883,051 | | |
| 11,778,957 | |
Subtotal | |
| 10,937,991 | | |
| 11,838,419 | |
Less: accumulated depreciation | |
| (14,381 | ) | |
| (5,117 | ) |
Property, plant and equipment, net | |
$ | 10,923,610 | | |
$ | 11,833,302 | |
Depreciation
expense was $9,891 and $5,117 for the years ended December 31, 2022 and 2021, 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 received 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 RMB115.2 million ($16.7 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 year ended December 31, 2021,
the Company recorded a gain of $7,648,423 for the asset disposal including $872,045 loss of asset disposal of 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 RMB300,000 ($43,496), and renewed on December 31, 2021 at a monthly rent
of RMB 400,000 ($57,994) from January 1, 2022 till October 31, 2023 for the use of the Demised Properties.
NOTE
6 – RELATED PARTY TRANSACTIONS
The
related party transactions are summarized as follows:
SCHEDULE
OF REVENUES FROM RELATED PARTY TRANSACTIONS
| |
2022 | | |
2021 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
Revenues resulting from related parties: | |
| | | |
| | |
Sales to Chengdu Wetouch Technology Co., Ltd (“Chengdu Wetouch”) | |
| - | | |
| 10,483 | |
Sales to Meishan Wetouch Electronics Technology Co., Ltd. (“Meishan Wetouch”) | |
| - | | |
| 87,367 | |
Total revenue | |
$ | - | | |
$ | 97,850 | |
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 to related parties are as follows:
SCHEDULE
OF RELATED PARTY TRANSACTIONS
| |
Relationship | |
December 31, 2022 | | |
December 31, 2021 | | |
Note |
Mr. Zongyi Lian | |
President and CEO of the Company | |
$ | 1,665 | | |
$ | 1,802 | | |
Payable to employee |
Mr. Guangde Cai | |
Former Chairman of the Company | |
| - | | |
| 32,867 | | |
Payable to employee |
Total | |
| |
$ | 1,665 | | |
$ | 34,669 | | |
- |
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%.
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, entitled it to a preferential income tax rate of 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 until
October 20, 2023.
Sichuan
Vtouch is entitled to 25% of income tax rate.
The
CIT Law and its implementation rules impose a withholding income tax at 10%, unless reduced by a tax treaty or arrangement, on the amount
of dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC that are related to earnings accumulated
beginning on January 1, 2008. Dividends relating to undistributed earnings generated prior to January 1, 2008 are exempt from such withholding
income tax.
The
components of the income tax provision are as follows:
SCHEDULE
OF COMPONENTS OF THE INCOME TAX PROVISION
| |
2022 | | |
2021 | |
| |
For the Years Ended December 31, | |
| |
2022 | | |
2021 | |
Current tax provision | |
| | | |
| | |
PRC | |
$ | 3,352,802 | | |
$ | 4,409,589 | |
Total current tax provision | |
$ | 3,352,802 | | |
$ | 4,409,589 | |
Deferred tax provision | |
| | | |
| | |
BVI | |
| - | | |
| - | |
Hong Kong | |
| - | | |
| - | |
China | |
| - | | |
| - | |
Total deferred tax provision | |
| - | | |
| - | |
Income tax provision | |
$ | 3,352,802 | | |
$ | 4,409,589 | |
The
following table reconciles the China statutory rates to the Company’s effective tax rate for the years ended December 31, 2022
and 2021:
SCHEDULE
OF INCOME TAX RATE
| |
2022 | | |
2021 | |
| |
For the Years Ended December 31, | |
| |
2022 | | |
2021 | |
PRC statutory income tax rate | |
| 25.0 | % | |
| 25.0 | % |
Effect of income tax holiday | |
| 0.0 | % | |
| (1.0 | )% |
Tax rate differential on entities not subject to PRC income | |
| (0.5 | )% | |
| (0.6 | )% |
R&D additional deduction | |
| (1.0 | )% | |
| (0.5 | )% |
Non-deductible expenses in the PRC | |
| 4.2 | % | |
| (2.7 | )% |
| |
| | | |
| | |
Effective tax rate | |
| 27.7 | % | |
| 20.2 | % |
Deferred
tax assets
The
Company’s has no deferred tax assets are as of December 31, 2022 and 2021, respectively.
The
Company follows ASC 740, “Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets
to the amount expected to be realized.
The
Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative
rulings. As of December 31, 2022 and 2021, Sichuan Wetouch and Sichuan Vtouch remains open for statutory examination by PRC tax authorities.
NOTE
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
| |
December 31,
2022 | | |
December 31, 2021 | |
Advance from customers | |
$ | 397,886 | | |
$ | 59,111 | |
Accrued payroll and employee benefits | |
| 89,359 | | |
| 99,342 | |
Accrued interest expenses | |
| 122,135 | | |
| 20,795 | |
Other tax payables (i) | (i) |
| 261 | | |
| - | |
Other payable to a former shareholder (ii) | (ii) |
| 191,180 | | |
| - | |
Others (iii) | (iii) |
| 153,803 | | |
| 131,159 | |
Accrued expenses and other current liabilities | |
$ | 944,624 | | |
$ | 310,407 | |
(i) | | Other tax payables
are mainly value added tax payable. |
(ii) | | Other payable to
a former shareholder was paid in March, 2023. |
(iii) | | Others mainly represent
accrued employee reimbursement payable and other accrued miscellaneous operating expenses. |
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
24, 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 recorded as deferred charges and included in the other current assets on the consolidated
balance 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 16%.
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 Uplist Offering; otherwise, the conversion price is $0.75
per share ($15.0 per share after post-Reverse
Stock Split).
Subject
to customary exceptions, if the Company issues shares or any securities convertible into shares of common stock at an effective price
per share lower than the conversion 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 Uplist Offering). If the Company prepays the Notes prior to the Maturity Date, the Company
shall pay a 10% prepayment penalty.
On
April 27, 2022, the Company entered into an amendment to the Note (“Amendment to Promissory Note”) issued to the Lender and,
on May 3, 2022, an amendment to the Registration Rights Agreement by and between the Company and the Lender (“Amendment to Registration
Rights Agreement”), extending the number of days the Company shall have in order to cause the registration statement covering the
resale of the Common Stock to become effective.
The
following table summarizes the outstanding promissory notes as of December 31, 2022 and 2021 (dollars in thousands):
SUMMARY
OF OUTSTANDING PROMISSORY NOTES
| |
| | |
2022 | | |
2021 | |
| |
Interest rate | | |
Principal Amount | | |
Carrying Amount | | |
Principal Amount | | |
Carrying Amount | |
| |
| | |
| |
Convertible Note- Talos Victory (Note 9 (b)) | |
| 8 | % | |
$ | - | | |
$ | - | | |
$ | 250,000 | | |
| 201,536 | |
Convertible Note-Mast Hill (Note 9 (b)) | |
| 8 | % | |
| 740,000 | | |
| 635,535 | | |
| 750,000 | | |
| 612,265 | |
Convertible Note-First Fire (Note 9 (b)) | |
| 8 | % | |
| 181,250 | | |
| 156,594 | | |
| 250,000 | | |
| 200,129 | |
Convertible Note-LGH Note 9 (b)) | |
| 8 | % | |
| 207,500 | | |
| 188,987 | | |
| 250,000 | | |
| 209,274 | |
Convertible Note -Fourth Man (Note 9 (b)) | |
| 8 | % | |
| 157,000 | | |
| 128,703 | | |
| 250,000 | | |
| 199,220 | |
Convertible Note-Jefferson Street Note 9 (b)) | |
| 8 | % | |
| 170,000 | | |
| 142,554 | | |
| 250,000 | | |
| 199,011 | |
Convertible Note -Blue Lake Note 9 (b))Total | |
| 8 | % | |
| - | | |
| - | | |
| 250,000 | | |
| 199,011 | |
Total | |
| | | |
$ | 1,455,750 | | |
$ | 1,252,373 | | |
$ | 2,250,000 | | |
$ | 1,846,583 | |
Amortization of discounts for year ended December 31, 2022
| |
| | | |
| | | |
| 24,909 | | |
| | | |
| | |
Convertible promissory notes payable as of December 31,2022 | |
| | | |
| | | |
$ | 1,277,282 | | |
| | | |
| | |
From
December 28, 2022 to January 18, 2023, the remaining five (5) lenders and the Company entered into an amendment to the Note (“Amendment
to Promissory Note”) extending maturity date for additional 6 months.
During
the year ended December 31, 2022, principal, accrued and unpaid interest and default charges totalling $1,038,426 was converted into
1,384,564 shares of common stock of the Company. And two notes were fully converted.
For
the year ended December 31, 2022 and 2021, the Company recognized interest expenses of the Notes in the amount of US$224,885 and US$27,447,
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 1,800,000 shares of the Company’s common stock (90,000 shares post-Reverse Stock Split) (the “Warrant Shares”).
The
Warrants issued to the Lenders granted each of the Lenders the right to purchase up to 200,000
shares (except Mast Hill Fund, L.P., which
was granted Warrants to purchase up to 600,000 shares (30,000 shares post-Reverse Stock Split)) of common stock (10,000
shares post-Reverse Stock Split) of the Company
at an exercise price of $1.25
per share ($25
per share post-Reverse Stock Split). 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
$1.25
per share ($25
per share post-Reverse Stock Split), 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.
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
April 14, April 27, and September 1, 2022, three lenders exercised cashless for 115,540
(5,777 shares post-Reverse Stock Split) (4th Man), 111,972
(5,599 shares post-Reverse Stock Split) (Talos) and 57,142
(2,858 shares post-Reverse Stock Split) (Blue lake) warrant shares, respectively.
The
fair values of these warrants as of December 31, 2022 were calculated using the Black-Scholes option-pricing model with the following
assumptions:
SCHEDULE
OF FAIR VALUE OF WARRANTS
| |
| | |
| | |
| | |
| | |
December 31, 2022 | |
| |
Volatility (%) | | |
Expected dividends yield (%) | | |
Weighted average expected life (year) | | |
Risk-free interest rate (%) (per annum) | | |
Common stock purchase warrants liability as of December 31, 2021(US$) | | |
Changes of fair value of common stock purchase warrants liability (+ (gains)/- losses(US$) | | |
Common stock purchase warrants liability as of December 31, 2022 (US$) | |
Convertible Note- Talos Victory (Note 9 (a)) | |
| 289.9 | % | |
$ | 0.0 | % | |
$ | 1.8 | | |
| 4.41 | % | |
| 124,756 | | |
| (109,953 | ) | |
| 14,803 | |
Convertible Note-Mast Hill (Note 9 (a)) | |
| 289.9 | % | |
| 0.0 | % | |
| 1.8 | | |
| 4.41 | % | |
| 375,156 | | |
| (273,863 | ) | |
| 101,293 | |
Convertible Note-First Fire (Note 9 (a)) | |
| 289.9 | % | |
| 0.0 | % | |
| 1.9 | | |
| 4.41 | % | |
| 125,408 | | |
| (91,489 | ) | |
| 33,919 | |
Convertible Note-LGH Note 9 (a)) | |
| 289.9 | % | |
| 0.0 | % | |
| 1.9 | | |
| 4.41 | % | |
| 125,664 | | |
| (91,636 | ) | |
| 34,028 | |
Convertible Note -Fourth Man (Note 9 (ab)) | |
| 289.9 | % | |
| 0.0 | % | |
| 1.9 | | |
| 4.41 | % | |
| 125,821 | | |
| (111,423 | ) | |
| 14,398 | |
Convertible Note-Jefferson Street Note 9 (a))3,054 | |
| 289.9 | % | |
| 0.0 | % | |
| 1.9 | | |
| 4.41 | % | |
| 125,915 | | |
| (91,781 | ) | |
| 34,134 | |
Convertible Note -Blue Lake Note 9 (a)) | |
| 289.9 | % | |
| 0.0 | % | |
| 1.9 | | |
| 4.41 | % | |
| 125,915 | | |
| (101,533 | ) | |
| 24,382 | |
Total | |
| | | |
| | | |
| | | |
| Total | | |
| 1,128,635 | | |
| (868,678 | ) | |
| 256,957 | |
(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
Ordinary
Shares
The
Company’s authorized number of ordinary shares was 300,000,000 shares with par value of $0.001.
On
December 22,2020, the Company issued 103,610
shares (5,181 shares post-Reverse Stock Split) 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 310,830
(15,541 shares post-Reverse Stock Split) 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 115,540 (5,777
post-Reverse Stock Split), 111,972
(5,599post-Reverse Stock Split) and 57,142
(2,857post-Reverse Stock Split) to three lenders respectively. (see Note 9 (b)).
During
the year ended December 31, 2022, the Company issued 124,223
shares (6,211 post-Reverse Stock Split) to a third party for warrant exercise (see Note 11).
During
the year ended December 31, 2022, the Company issued 1,384,564
shares (69,228 shares post-Reverse Stock Split) of common stock for the conversion of convertible promissory note payable (see note
9 (a)).
As
of December 31, 2022, the Company had 33,604,965
issued and outstanding shares (1,680,248 shares post-Reverse Stock Split).
Statutory
reserve and restricted net assets
Under
PRC rules and regulations, all subsidiaries of Wetouch in the PRC are required to appropriate
10% of their net income to a statutory surplus reserve until the reserve balance reaches 50% of their registered capital. The appropriation
to this statutory surplus reserve must be made before distribution of dividends can be made. The statutory reserve is non-distributable,
other than during liquidation, and can be used to fund previous years losses, if any, and may be converted into share capital by issuing
new shares to existing shareholders in proportion to their shareholders or by increasing the par value of the shares currently outstanding,
provided that the remaining balance of the statutory reserve after such issue is not less than 25% of the registered capital.
Appropriations
to the discretionary surplus reserve are made at the discretion of the board of directors. The statutory reserve may be applied against
prior year losses, if any, and may be used for general business expansion and production or increase in registered capital, but are not
distributable as cash dividends.
For
the years ended December 31, 2022 and 2021, the Company made appropriations to the reserve fund of RMB6,554,271(equivalent to US$973,718)
and RMB12,933,795 (equivalent to US$2,005,084), respectively.
NOTE
11- SHARE BASED COMPENSATION
The
Company applied ASC 718 and related interpretations in accounting for measuring the cost of share-based compensation over the period
during which the consultants are required to provide services in exchange for the issued shares. The fair value of above award was estimated
at the grant date using Black-Scholes model for pricing the share compensation expenses.
On
December 22, 2020, the Board of Directors of the Company authorized the issuance of an aggregate of 103,610
shares (5,181post-Reverse Stock Split) and 210,360
warrants to The Crone Law Group, P.C. or its designees for legal services that had been rendered. The five-year warrants are
exercisable at one cent per share.
The
shares of 103,610
(5,181 post-Reverse
Stock Split) were vested on December 22, 2020 and no
warrants were exercised. 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 43.5%
and an average interest rate of 0.11%.
On
January 1, 2021, the Board of Directors of the Company authorized the issuance of an aggregate of 310,830
shares (15,541
shares post-Reverse Stock Split) and 631,080
warrants (31,554
post-Reverse Stock Split) 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 310,830
shares of common stock (15,541 shares post-Reverse Stock Split) and 631,080
warrants were vested (31,554 post-Reverse Stock Split) on January 1, 2021 and during the year ended December 31, 2022, 124,223
warrant shares (6,211 warrant shares post-Reverse Stock Split) were exercised cashless.
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 1.5 years, expected dividend rate of 0%, volatility
of 215.4% and an average interest rate of 2.96%.
As
of December 31, 2022, the Company had 841,440
warrants (42,072 post-Reverse Stock Split) outstanding related to above mentioned services with i) weighted average exercise price
of $0.01 ($0.2 post-Reverse Stock Split);
ii) weighted average remaining contractual life of 1.00
years; and iii) aggregate intrinsic value of $0.2
million.
For
the year ended December 31, 2022 and 2021, the Company recognized relevant share-based compensation expense of nil and $1,041,281 for
the vested shares, and nil and $2,107,825 for the warrants, respectively
NOTE
12. WEIGHTED AVERAGE NUMBER OF SHARES
In
October 2020, the Company entered into a reverse merger transaction. The Company computes the weighted-average number of common shares
outstanding in accordance with ASC 260 states that in calculating the weighted average shares when a reverse merger takes place in the
middle of the year, the number of common shares outstanding from the beginning of that period to the acquisition date shall be computed
on the basis of the weighted-average number of common shares of the legal acquiree (accounting acquirer) outstanding during the period
multiplied by the exchange ratio established in the merger agreement. The number of common shares outstanding from the acquisition date
to the end of that period shall be the actual number of common shares of the legal acquirer (the accounting acquiree) outstanding during
that period.
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.
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.
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.
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. For the year ended December 31, 2022, six customers accounted for 21.2%,
16.1%, 14.8%, 13.7%, 11.9% and 10.1%, respectively, of the Company’s revenue. For the year ended December 31, 2021, five customers
accounted for 19.5%, 17.3%, 14.5%, 14.2%, and 11.1%, respectively, of the Company’s revenue.
And
the Company’s top 10 customers aggregately accounted for 98.7% and 97.5%% of the total revenue for the years ended December 31,
2022 and 2021, respectively.
As
of December 31, 2022 three customers accounted for 32.2%, 22.8%, and 14.0% of the total accounts receivable balance, respectively.
As
of December 31, 2021, six customers accounted for 25.7%, 18.6%, 12.5%, 11.5%, 11.3% and 10.2% 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 47.2% (four suppliers) and 11.2% (one supplier)
of the Company’s total raw material purchases for the years ended December 31, 2022 and 2021, respectively.
NOTE
13 — COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
From
time to time, the Company and its affiliates are parties to various legal actions arising in the ordinary course of business. Although
Sichuan Wetouch and Hong Kong Wetouch, the previous subsidiaries of the Company, and 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 (See Item 13- Legal
Proceedings). Accordingly, there are no pending material legal proceedings against the Company.
i) |
An equity dispute case with Yunqing Su with a disputed amount
of RMB1,318,604 (equivalent to $191,180) |
On
June 22, 2017, Yunqing Su, a former shareholder, entered an Equity Investment Agreement with Sichuan Wetouch and Guangde Cai, agreed
that Yunqing Su would invest RMB1 million (equivalent to $149,853) to purchase 370,370.37 original listed shares of the target company,
and provided for the exit mechanism in the agreement. However, the target company failed to be listed prior to December 31, 2017 as agreed.
On June 22, 2017, Guangde Cai and Yunqing Su entered into a supplementary agreement, pursuant to which Guangde Cai shall repurchase all
of Yunqing Su’s equity interest and pay the interest. Sichuan Wetouch repaid Yunqing Su the interest of RMB220,000 (equivalent
to $32,968) and the principal of RMB128,000 (equivalent to $19,181) in November 2018. The repayment period set forth in the supplementary
agreement expired, but Sichuan Wetouch and Guangde Cai failed to pay the principal and interest owed to Yunqing Su. Yunqing Su sued Sichuan
Wetouch and Guangde Cai to the Renshou County People’s Court of Sichuan Province, and the case was filed on February 9, 2022.
On
May 9, 2022, pursuant to a civil mediation statement issued by the Renshou County People’s Court of Sichuan Province, Sichuan
Wetouch and Guangde Cai agreed to repay Yunqing Su the principal and interest in the total amount of RMB 1,318,604
(equivalent to $191,180).
Sichuan Wetouch fully paid the aforesaid amount on March 15, 2023.
ii) | Legal
case with Chengdu SME Credit Guarantee Co., Ltd. on a court acceptance fee of RMB338,418
(equivalent to $49,066) |
On
July 5, 2013, Sichuan Wetouch obtained a one-year loan of RMB60.0 million (equivalent to $9.8 million) from Bank of Chengdu, at an annual
interest rate of 8.61%. Chengdu SME Credit Guarantee Co., Ltd (“Chengdu SME”), a third party, provided a 70% guarantee and
Bank of Chengdu retained 30% of the risk, while Chengdu Wetouch and Mr. Guangde Cai provided joint and several liability guarantee for
100% of the loan.
On
July 31, 2014, Sichuan Wetouch repaid RMB5.0 million (equivalent to $0.8 million). The remaining loan of RMB55.0 million (equivalent
to $8.9 million) was twice extended to be due on August 22, 2018. Upon the loan becoming due, but unpaid by the Company, Chengdu SME
paid the outstanding balance of RMB55 million (equivalent to $8.9 million) to Bank of Chengdu. The Company subsequently repaid RMB55
million (equivalent to $8.0 million) to Chengdu SME; however, Chengdu SME filed two separate lawsuits against the Company to recover
loan default penalties from the Company. The loan default penalties were (a) RMB5.8 million (equivalent to $0.8 million) related to the
30% of the remaining loan balance repaid by Chengdu SME and (b) RMB6.0 million (equivalent to $0.9 million) related to the 70% of the
remaining loan balance repaid by Chengdu SME. During the year ended December 31, 2017, the Company recorded loan default penalties, and
related liabilities, of $1.7 million.
Chengdu
SME applied to the Chengdu High-tech Court for enforcement for the above-mentioned loan default penalties of RMB5.8 million (equivalent
to $0.8 million) and RMB6.0 million (equivalent to $0.9 million) on December 30, 2018. On March 12, 2020, the Enforcement Settlement
Agreement issued by the Chengdu High-tech Court confirmed that Sichuan Wetouch still owed RMB5.8 million (equivalent to $0.8 million)
and RMB6.0 million (equivalent to $0.9 million) of loan default penalties. The agreement did not specify which party shall pay the court
fee.
On
September 16, 2020, Sichuan Wetouch made a full repayment of RMB11.8 million (equivalent to $1.7 million) of the above loan default penalties
to Chengdu SME.
On
March 16, 2023, pursuant to an Enforcement Settlement Agreement entered among Chengdu SME, Sichuan Wetouch and Chengdu Wetouch,
Chengdu Wetouch agreed to pay the court acceptance fee of RMB338,418
(equivalent to $49,066).
On March 17, 2023, Chengdu Wetouch made a full payment of the above court fee to Chengdu SME.
iii) | Legal
case with Zhuhai Hongguang Technology Co., Ltd on the total amount of RMB131,859 (equivalent
to $19,118) for goods and liquidated damages |
In
September 2016, Sichuan Wetouch started purchasing components from Hongguang Technology Co., Ltd (“Hongguang Technology”)
by sending a Purchase Order to Hongguang Technology and agreed to bear 20% of the breach of contract as liquidated damages. On November
30, 2021, Hongguang Technology filed a complaint with Renshou County People’s Court of Sichuan Province, requesting Sichuan Wetouch
to pay RMB109,883.2
(equivalent to $16,466)
in arrears and liquidated damages of RMB21,976.64
(equivalent to $3,293).
Thereafter, the parties entered into a settlement agreement, pursuant to which Sichuan Wetouch agreed to pay the principal of outstanding
payment and liquidated damages in the total amount of RMB 131,859
(equivalent to $19,118)
on a lump-sum basis. Sichuan Wetouch paid the entire aforesaid amount to Hongguang Technology on February 16, 2022.
iv) | Legal
case with Lifan Financial Leasing (Shanghai) Co., Ltd. and Sichuan Wetouch, Chengdu Wetouch,
Meishan Wetouch and Xinjiang Wetouch Electronic Technology Co., Ltd. on a court acceptance
fee of RMB RMB250,470
(equivalent
to $36,315) |
On
November 20, 2014, Lifan Financial Lease (Shanghai) Co., Ltd. (“Lifan Financial”) and Chengdu Wetouch entered into a
Financial Lease Contract (Sale and Leaseback), which stipulated that Lifan Financial shall lease the equipment to Chengdu Wetouch
after the purchase of the production equipment owned by Chengdu Wetouch at a purchase price, the purchase price/lease principal
shall be RMB20
million, the rental interest rate of the leased equipment shall be 8%
per year, and the lease term shall be 24 months. Upon the expiration of the lease term, Lifan Financial shall transfer the leased
property to Chengdu Wetouch or a third party designated by Chengdu Wetouch at the price of RMB0 after Chengdu Wetouch has fully
fulfilled its obligations, including, without limitation, the payment of the rent, liquidated damages (if any) and other contractual
obligations. Guangde Cai, Sichuan Wetouch, Meishan Wetouch and Xinjiang Wetouch Electronic Technology Co., Ltd. (“Xinjiang
Wetouch”) provided Lifan Financial with joint and several liability guarantee.
On
August 9, 2021, Lifan Financial filed a lawsuit against Chengdu Wetouch, Guangde Cai, Sichuan Wetouch, Meishan Wetouch and Xinjiang
Wetouch to the Chengdu Intermediate People’s Court. The court ruled that: 1) the Financial Lease Contract (Sale and Leaseback)
was terminated; 2) the leased property was owned by Lifan Financial; 3) Chengdu Wetouch shall pay Lifan Financial all outstanding
rent and interest thereon in the total amount of RMB 22,905,807.12
as well as the difference between the liquidated damages and the value of the leased property recovered; etc.
The
parties executed a settlement agreement on March 7, 2023, in which the parties confirmed that the outstanding payment of RMB 22,905,807.12
has been fully paid up on December 23, 2021 and
the above cases have been settled. As for the court acceptance fees that were not previously agreed upon by the parties, Chengdu Wetouch
agreed to pay the court acceptance fee of RMB 250,470
(equivalent to $36,315).
Chengdu Wetouch paid the aforesaid fees to Lifan Financial on March 10, 2023.
v) | Legal
case with Sichuan Renshou Shigao Tianfu Investment Co., Ltd and Renshou Tengyi Landscaping
Co., Ltd. on a court acceptance fee of RMB103,232 (equivalent to $14,967) |
On
March 19, 2014, Chengdu Wetouch, a related party, obtained a two and half-year loan of RMB15.0 million (equivalent to $2.2 million) from
Chengdu Bank Co., Ltd. Gaoxin Branch (“Chengdu Bank Gaoxin Branch”) , with Chengdu Hi-tech Investment Group Co., Ltd. (“CDHT
Investment”) acting as guarantor to pay off the loan principal and related interests, while Sichuan Wetouch and Hong Kong Wetouch
as guarantors, were jointly and severally liable for such debts.
Upon
the loan due in January 2017, Chengdu Wetouch defaulted the loan, thus, CDHT Investment filed a lawsuit against Chengdu Wetouch, Sichuan
Wetouch, and Hong Kong Wetouch demanding a full repayment of such debts.
To
support the local economic development as well as Chengdu Wetouch, two government-backed companies, Sichuan Renshou Shigao Tianfu Investment
Co., Ltd. (“Sichuan Renshou”) and Renshou Tengyi Landscaping Co., Ltd. (“Renshou Tengyi”) provided their bank
deposits of RMB 12.0 million (equivalent to $1.7 million) as pledge, while Mr. Guangde Cai and Sichuan Wetouch also provided counter-guarantee.
Upon
the expiration of the guarantee, Chengdu Wetouch still defaulted on repayment of the above pledge. As a result, CDHT Investment levied
this collateral of RMB12.0 million. On November 21, 2019. Subsequently, Sichuan Renshou and Renshou Tengyi filed with Chengdu Intermediate
People’s Court a lawsuit demanding an asset recovery of RMB12.0 million (equivalent to $1.7 million) pursuant to the counter guarantee
agreement.
On
December 2, 2019, pursuant to the reconciling agreement issued by Chengdu Intermediate People’s Court, the parties agreed to cancel
the demand to seize property of Sichuan Wetouch rather than the property of Chengdu Wetouch, and to waive freezing Guangde Cai’s
60% shareholding equity in Xinjiang Wetouch Electronic Technology Co., Ltd.
On
October 9, 2020, pursuant to a settlement and release agreement, Sichuan Wetouch, Hong Kong Wetouch and Guangde Cai are fully discharged
and released from any and all obligations under the outstanding debts, and from all liabilities under guarantee with Chengdu Wetouch
being responsible for the outstanding debts by December 31, 2020.
On
October 27, 2020, Chengdu Wetouch made a full payment of the above debts.
The
settlement and release agreement did not specify which party shall pay the court acceptane fee. On March 10, 2023, pursuant to an enforcement
settlement agreement entered among Sichuan Renshou, Renshou Tengyi, Sichuan Wetouch, Chengdu Wetouch, and other relevant parties, Sichuan
Wetouch agreed to pay the court acceptance fee of RMB103,232 (equivalent to $14,967). On March 17, 2023, Chengdu Wetouch made a full
payment of the above court fee to Sichuan Renshou.
vi) | Legal
case with Chengdu High Investment Financing Guarantee Co. on a court acceptance fee of RMB250,000
(equivalent to $36,246) |
On
March 22, 2019, Chengdu High Investment Financing Guarantee Co., Ltd, (“Chengdu High Investment”) filed a lawsuit against
Hong Kong Wetouch to the Chengdu Intermediate People’s Court, claiming that Hong Kong Wetouch should assume the guarantee liability
for the debt payable by Chengdu Wetouch. On May 21, 2020, the court rendered a judgment ordering Hong Kong Wetouch to pay compensation
of RMB17,467,042
(equivalent to $2,617,491),
interest, liquidated damages, liquidated damages for late performance, etc.
On
March 16, 2023, Chengdu Wetouch, Sichuan Wetouch and Chengdu High Investment entered into a settlement enforcement agreement, confirming
that Chengdu High Investment had received RMB17,547,197.5
(equivalent to $2,629,503)
on October 27, 2020, and the above case has been settled. As for the court acceptance fees that were not previously agreed upon by the
parties, Chengdu Wetouch agreed to pay the court acceptance fee of RMB 250,000
(equivalent to $36,246).
Chengdu Wetouch paid the aforesaid fees to Chengdu High Investment on March 20, 2023.
vii) | Legal
case with Hubei Lai’en Optoelectronics Technology Co., Ltd. on a product payment of
RMB157,714 (equivalent to $22,866) |
Sichuan
Wetouch purchased products from Hubei Lai’en Optoelectronics Technology Co., Ltd. (“Hubei Lai’en) multiple times
from March to June 2019, but failed to pay the corresponding amount of RMB137,142.7
for the purchased products. On April 6, 2022,
Hubei Lai’en filed a lawsuit against Sichuan Wetouch to the Renshou County People’s Court of Sichuan Province, requesting
payment of overdue payment for the products and liquidated damages. On May 31, 2022, the Renshou County People’s Court rendered
a judgment that Sichuan Wetouch shall pay Hubei Lai’en the price of goods of RMB137,143
and liquidated damages of RMB 20,571.
Sichuan Wetouch paid the above amount to Hubei Lai’en on March 15, 2023.
viii) | Legal
case with Shenzhen Helitong Technology Co., Ltd. on a product payment of RMB229,513 (equivalent
to $34,393) |
Sichuan
Wetouch purchased products from Shenzhen Helitong Technology Co., Ltd. (“Shenzhen Helitong”) multiple times from January
to June 2020, but failed to pay some of the purchase fee for the products. On October 21, 2021, Shenzhen Helitong filed a lawsuit against
Sichuan Wetouch to the Renshou County People’s Court of Sichuan Province, requesting payment of overdue payment for the products
and interests. On October 10, 2021, pursuant to a civil mediation letter issued by the Renshou County People’s Court, both parties
agree that Sichuan Wetouch shall pay a total of RMB229,513
(equivalent to $34,393)
to Shenzhen Helitong, and the other claims waived by Shenzhen Helitong. As of February 16, 2022, Sichuan Wetouch made a full payment
of RMB229,513
(equivalent to $33,276)
to Shenzhen Helitong.
ix) | Legal
case with Xinjiang Weiyida Real Estate Development Co., Ltd on a loan payment of RMB17,318,625
(equivalent to $2,510,964) |
Xinjiang
Weiyida Real Estate Development Co., Ltd (“Weiyida Real Estate”) filed a lawsuit against Meishan Wetouch, Guangde Cai, Sichuan
Wetouch, Xinjiang Wetouch, Sichuan Yitong Financing Guarantee Co., Ltd to the Renshou County People’s Court of Sichuan Province
and applied for property preservation on February 14, 2022 with respect to the dispute over recovery right in connection with the loan
agreement. The parties entered into a settlement agreement and agreed that Meishan Wetouch shall repay the principal of RMB$17,318,625
(equivalent to $2,595,250) and liquidated damages to Weiyida Real Estate in a lump sum. On March 14, 2022, Meishan Wetouch paid RMB$17,318,625
(equivalent to $2,510,964) to Weiyida Real Estate.
Capital
expenditure commitment
On
December 20, 2021, the Company entered into a contract with 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 December 31, 2022, the Company
has prepaid RMB15.0 million (equivalent to US$2.2 million) and recorded as construction in progress (see Note 5) and had a remaining
balance of RMB5.0 million (equivalent to US$0.7 million) to be paid by the end of 2023.
NOTE
14 — REVENUES
The
Company’s geographical revenue information is set forth below:
SCHEDULE
OF GEOGRAPHICAL REVENUE INFORMATION
| |
2022 | | |
2021 | |
| |
For the Years Ended December 31, | |
| |
2022 | | |
2021 | |
Sales in PRC | |
$ | 26,438,509 | | |
$ | 27,213,684 | |
Sales in Overseas | |
| | | |
| | |
-Republic of China (ROC, or Taiwan) | |
| 6,146,043 | | |
| 7,246,592 | |
-South Korea | |
| 5,221,209 | | |
| 5,962,067 | |
-Others | |
| 126,351 | | |
| 363,131 | |
Sub-total | |
| 11,484,603 | | |
| 13,571,790 | |
Total revenues | |
$ | 37,923,112 | | |
$ | 40,785,474 | |
NOTE
15 — SUBSEQUENT EVENTS
1)
Private Placement
On
January 19, 2023, Wetouch Technology Inc., a Nevada corporation (the “Company”), entered into a Securities Purchase
Agreement (the “Agreement”) with the buyers indicated therein (collectively, the “Buyers”), pursuant to
which the Company sold to the Buyers an aggregate of 160,000,000
shares of the common stock (8,000,000 shares post-Reverse Stock Split) of the Company (the “Shares”) for an aggregate
purchase price of $40,000,000,
or $0.25
per share ($5.00 per share post-Reverse Stock Split). The net proceeds of the offering (after deducting legal and accounting fees and expenses) shall be used by the Company
for working capital and general corporate purposes and the repayment of debt.
On
January 20, 2023, the Company received net proceeds of $40 million accordingly.
2)
Reverse Stock Split
On
February 17, 2023, the Board 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.
2,160,000
Shares of Common Stock
![](https://www.sec.gov/Archives/edgar/data/1826660/000149315224007567/forms-1_016.jpg)
WETOUCH
TECHNOLOGY INC.
PROSPECTUS
WestPark
Capital |
Orientiert |
Craft Capital |
R.F.
Lafferty |
February 20, 2024
Wetouch Technology (QB) (USOTC:WETHD)
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