WETH Wetouch Technology Inc

NOTE 1 — ORGANIZATION AND 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 the Company’s 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, the Company 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 became a wholly-owned subsidiary of the Company.

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 the “PRC”). Sichuan Wetouch is primarily engaged in the business of research and development, manufacturing, and distribution of touchscreen displays to customers both in the PRC and overseas. The touchscreen products, which are manufactured by the Company, are primarily applied for use in financial terminals, automotive, Point of Sales, gaming, lottery, medical, Human-Machine Interface (HMI), and other specialized industries.

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.

Through its wholly-owned subsidiaries, the Company is engaged in the research, development, manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens. The Company specializes in large-format touchscreens, which are developed and designed for a wide variety of markets and used in the financial terminals, automotive, Point of Sales, gaming, lottery, medical, Human-Machine Interface (“HMI”), and other specialized industries.

Corporate History of BVI Wetouch

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 (the “SAR”) on December 3, 2020. On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Wetouch. 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 stockholder meeting.

Sichuan Wetouch was formed on May 6, 2011 in the PRC and became a wholly foreign-owned enterprise (“WFOE”) in the PRC on February 23, 2017. On July 19, 2016, Sichuan Wetouch was 100% held by HK Wetouch.

On December 30, 2020, Sichuan Vtouch was incorporated in Chengdu, Sichuan, under the PRC laws.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 3 — ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

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 consisted of the following:

NOTE 5 — PROPERTY, PLANT AND EQUIPMENT, NET

Depreciation expense was $2,561 and $2,294 for the three months ended September 30, 2024 and 2023, respectively, and $7,307 and $9,465 for the nine months ended September 30, 2024 and 2023, respectively.

Pursuant to local PRC government guidelines on local environment issues and the national overall plan, Sichuan Wetouch was subject to a government directed relocation order to relocate by no later than December 31, 2021 with corresponding compensation. 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 ($16.4 million) (the “Compensation Funds”) for the withdrawal of the right to use of state-owned land (the “property”) 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 the Company’s 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 liability company owned by the local government, to lease the property, and all buildings, facilities and equipment thereon (the “Demised Properties) of Sichuan Wetouch, commencing from April 1, 2021 until December 31, 2021 at a monthly rent of RMB300,000 ($41,281). The lease was renewed on December 31, 2021 and August 9, 2024, respectively, with a monthly rent of RMB 400,000 ($57,000), the term of which has been extended to October 31, 2025 for the use of the Demised Properties.

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

NOTE 6 — RELATED PARTY TRANSACTIONS

Amounts due to related parties were as follows:

Chengdu Wetouch Intelligent Optoelectronics Co., Ltd. was incorporated on December 30, 2020 in Chengdu, Sichuan Province under the laws of PRC, with Ms. Jiaying Cai, a director of the Company as its sole shareholder holding 100% of its equity interests.

Chengdu Frejoo Enterprise Management Co., Ltd. was incorporated on March 20, 2018 in Chengdu, Sichuan Province under the laws of PRC, with Ms. Jiaying Cai, a director of the Company as its major shareholder holding 68% of its equity interests.

NOTE 7 — INCOME TAXES

Wetouch

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

BVI Wetouch

Under the current laws of the British Virgin Islands, BVI Wetouch, a wholly owned subsidiary 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 stockholders.

Hong Kong

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

PRC

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.

Sichuan Vtouch is subject to a 25% income tax rate.

The effective income tax rates for the nine months ended September 30, 2024 and 2023 were 25.4% and 28.5%, respectively.

The estimated effective income tax rate for the year ending December 31, 2024 would be similar to actual effective tax rate of the nine months ended September 30, 2024.

NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

NOTE 9 — CONVERTIBLE PROMISSORY NOTES PAYABLE

a) Convertible promissory notes 

In October, November, and December 2021, the Company, issued seven (7) convertible promissory notes (the “Notes”) of an aggregate principal amount of $2,250,000, due in one year with discounted issuance price at 90.0%.  The Notes bore interest at a rate of 8.0% per annum, payable in one year and matured on October 27, November 5, November 16, November 24, November 29, and December 2, 2022, respectively. Net proceeds after debt issuance costs and debt discounts were approximately $1,793,000. Debt issuance costs in the amount of $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 the 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 the lesser of 16% and the maximum amount permitted by law. 

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 180^th 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.

From December 28, 2022 to April 6, 2023, the lenders of five outstanding Notes and the Company entered into two amendments to the Notes extending the term of the Notes for a total of additional 6 months. 

From August 8 to September 7, 2023, the lenders of the outstanding Notes and the Company entered into an amendment to the Notes  that upon the listing of the Company’s common stock 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 year ended December 31, 2023, principal and default charges totaling $1,200,000 were converted into 25,000 shares of common stock of the Company.

During the year ended December 31, 2023, principal, accrued and unpaid interest and default charges totaling $1,038,426 were converted into 69,228 shares of common stock of the Company. Two notes were fully converted.

NOTE 10 — STOCKHOLDERS’ EQUITY

1) Common Stock

The Company’s authorized shares of common stock 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 and September 1, 2022, the Company issued 5,777, 5,599 and 2,857 shares of common stock upon cashless exercise of the Note Warrants to three lenders, respectively. (see Note 9 (b)).

During the year ended December 31, 2022, the Company issued 6,211 shares of common stock to a third party upon exercise of warrants (see Note 11).

During the year ended December 31, 2022, the Company issued 69,228 shares of common upon 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 common stock to purchasers in a 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.

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 the 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 5,181 shares and warrants to purchase an aggregate of 10,518 shares of common stock 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.

5,181 shares of common stock underlying such warrants were vested on December 22, 2020 and 6,211 shares were issued upon exercise of these warrants on September 21, 2022 and warrant to purchase 4,307 shares remained outstanding 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 warrants to purchase 31,554 shares of common stock to a third party service provider for consulting services that had been rendered. These warrants have a five-year term and are exercisable at one cent per share.

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

The fair value of the above warrants 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%.

During the nine months ended September 30, 2024, warrants for 35,861 shares of common stock related to above mentioned services were exercised. There were no warrants related to services remaining as of September 30, 2024.

As of September 30, 2024 and 2023, the Company recognized relevant share-based compensation expense of nil and nil for the vested shares, and nil and nil for the warrants, respectively.

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 to 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 months ended September 30, 2024, five customers accounted for approximately 21.4%, 19.5%, 15.9%, 14.4% and 12.0%, respectively, of the Company’s total revenue. For the three-month periods ended September 30, 2023, five customers accounted for approximately 20.5%, 17.4%, 15.7%, 15.6% and 12.3%%, respectively, of the Company’s revenue.

For the nine months ended September 30, 2024, five customers accounted for approximately 21.7%, 19.9%, 15.4%, 14.0% and 11.7%, respectively, of the Company’s total revenue. For the nine months ended September 30, 2023, five customers accounted for approximately 22.0%, 16.1%, 15.9%, 14.4%, and 11.6%, respectively, of the Company’s revenue. 

The Company’s top ten customers aggregately accounted for 99.95% and 99.8% of the total revenue for the three months ended September 30, 2024 and 2023, and approximately 99.4% and 99.6% for the nine months ended September 30, 2024 and 2023. As of September 30, 2024, seven customers accounted for approximately 19.7%, 17.3%, 16.6%, 11.9%, 11.4%, 11.0% and 10.4% 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 an aggregate of approximately 23.8% (two suppliers) and 23.0% (two suppliers) for the three months ended September 30, 2024 and 2023, respectively, and approximately 39.55% (three suppliers) and 11.9% (one supplier) for the nine months ended September 30, 2024 and 2023, respectively.

NOTE 13 — COMMITMENTS AND CONTINGENCIES

Contingencies

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

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

Legal Proceedings

From time to time, the Company and its subsidiaries are parties to various legal actions arising in the ordinary course of business. Although Hong Kong Wetouch, Sichuan Wetouch, the deconsolidated subsidiary of the Company (see Note 2-(a) - Deconsolidation of Sichuan Wetouch), Sichuan Vtouch and Mr. Guangde Cai, the former Chairman and director of the Company, were named as defendants in several litigation matters, as of the date of this Quarterly Report, some of which have been settled and Sichuan Wetouch, Hong Kong Wetouch and Mr. Guangde Cai were unconditionally and fully discharged and released therefrom. Below is a summary of the above-mentioned litigation. 

On June 22, 2017, Yunqing Su, a former shareholder of Sichuan Wetouch, entered into an Equity Investment Agreement with Sichuan Wetouch and Guangde Cai, pursuant to which Yunqing Su would invest RMB1 million (equivalent to $140,847) to purchase 370,370.37 original proposed listed shares of the proposed listed company on Australian capital market, Sichuan Wetouch, and provided for the exit mechanism in the agreement. However, the target company failed to be listed on Australian capital market 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 interests and pay the interest. Sichuan Wetouch repaid Yunqing Su the interest of RMB220,000 (equivalent to $30,986) and the principal of RMB128,000 (equivalent to $18,028) in November 2018. However, upon the expiration of the supplementary agreement, Sichuan Wetouch and Guangde Cai failed to repay the remaining principal balance plus interest owed to Yunqing Su. Yunqing Su subsequently sued Sichuan Wetouch and Guangde Cai in 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 remaining principal balance plus interest in the total amount of RMB 1,318,604 (equivalent to $185,721). Sichuan Wetouch fully repaid the aforesaid amount on March 15, 2023.

On July 5, 2013, Sichuan Wetouch obtained a one-year loan of RMB60.0 million (equivalent to $8.5 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. Chengdu Wetouch, a related party company with 98% equity interests owned by Mr. Guangde Cai, the founder of the Company, 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 $0.7 million). The remaining loan of RMB55.0 million (equivalent to $7.7 million) was extended twice due on August 22, 2018. Upon the loan becoming due, but unpaid by the Company, Chengdu SME repaid the outstanding balance of RMB55 million (equivalent to $7.7 million) to Bank of Chengdu. The Company subsequently repaid RMB55 million (equivalent to $7.7 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 $0.8 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.

NOTE 14 — REVENUES

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