Wetouch Technology Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we describe under Item 1A. Risk Factors” and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements.” Overview We were originally incorporated under the laws of the state of Nevada in August 1992. On October 9, 2020, we entered into the Share Exchange Agreement with BVI Wetouch and all the shareholders of BVI Wetouch, to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange for the issuance to such shareholders an aggregate of 28 million shares of our common stock. The Reverse Merger closed on October 9, 2020. As a result of the Reverse Merger, BVI Wetouch became our wholly-owned subsidiary. Through our wholly-owned subsidiaries, BVI Wetouch, HK Wetouch, and Sichuan Vtouch, we are engaged in the research, development, manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens. We are specialized in large-format touchscreens, which are developed and designed for a wide variety of markets and used in by the financial terminals, automotive, 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. We generate revenues through sales of our various touchscreen products. For the years ended December 31, 2025 and 2024, we recognized approximately $45.1 million and $42.3 million, respectively, in total 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 years ended December 31, 2025 and 2024, our domestic sales accounted for approximately 68.5% and 64.7%, respectively, of our revenues, and our international sales accounted for approximately 31.5% and 35.3%, respectively, of our revenues. Construction of our new facility We have been actively engaged in the construction of our new production facilities and office buildings in Chengdu Medicine City (Technology Park), Wenjiang District, Chengdu, Sichuan Province, People’s Republic of China since the summer of 2023. The Company has planned to increase the scope of facility construction by adding a touch machine construction area. Due to the delayed supply of construction materials, the project has been progressed slowly than expected. As of the date of this Annual Report, the Company estimated the construction to be completed by the first half of 2027 and commence production by the end of 2027. The total capital requirements for the new facility construction totaled approximately $14.4 million and $13.3 million have been recorded in the construction in progress as of December 31, 2025. The Company primarily fund the project with our existing cash on hand and cash flows generated from operations, and we may seek additional financing if needed to support the timely completion of the project. Highlights for the Year Ended December 31, 2025 ● Revenues were $45.1 million, an increase of 6.6% from $42.3 million for the year ended December 31, 2024. ● Gross profit was $14.4 million, an increase of 5.9% from $13.6 million for the year ended December 31, 2024. ● Gross profit margin was 31.8%, as compared to 32.2% for the year ended December 31, 2024. ● Net income was $7.2 million, an increase of 20.0% from $6.0 million for the year ended December 31, 2024. ● Total volume of touchscreens shipped was 2,195,542 units, an increase of 6.5% from 2,060,870 units of touchscreens for the year ended December 31, 2024. 54 Results of Operations The following table sets forth, for the periods indicated, statements of income data: For the Years Ended December 31, Change (in US Dollar millions, except percentage) 2025 2024 % Revenues $ 45.1 $ 42.3 6.6 % Cost of revenues (30.7 ) (28.7 ) 7.0 % Gross profit 14.4 13.6 5.9 % Total operating expenses (4.4 ) (4.3 ) 2.3 % Operating income 10.0 9.3 7.5 % Total other income (expenses), net 0.2 (0.6 ) 133.3 % Income before income taxes 10.2 8.7 17.2 % Income tax expenses (3.0 ) (2.7 ) (11.1 )% Net income $ 7.2 $ 6.0 20.0 % For the Years Ended December 31, 2024 and 2025 Revenues Revenues were $45.1 million for the year ended December 31, 2025, representing an increase of $2.8 million, or 6.6%, compared with $42.3 million for the same period in 2024. This was mainly due to the increase of 6.5% in sales volume, and an increase of 0.1% in the average selling price of our products in RMB, and 0.1% positive impact from exchange rate due to appreciation of RMB against US dollars, as compared with those of the same period in 2024. For the Years Ended December 31, 2025 2024 Change Change Amount % Amount % Amount % (in US Dollar except percentage) Revenue from sales to customers in the PRC $ 30,934,806 68.5 % $ 27,340,555 64.7 % $ 3,594,251 13.1 % Revenue from sales to customers overseas 14,202,012 31.5 % 14,939,818 35.3 % (737,806 ) (4.9 )% Total Revenues $ 45,136,818 100 % $ 42,280,373 100 % $ 2,856,445 6.6 % For the Years Ended December 31, 2025 2024 Change Change Unit % Unit % Unit % (in Unit, except percentage) Units sold to customers in the PRC 1,488,823 67.8 % 1,309,240 63.5 % 179,583 13.7 % Units sold to customers overseas 706,719 32.2 % 751,630 36.5 % (44,911 ) (6.0 )% Total Units Sold 2,195,542 100 % 2,060,870 100 % 134,672 6.5 % PRC Domestic Market For the year ended December 31, 2025, revenue from the PRC domestic market increased by $3.6 million or 13.1%, as a combined result of (i) an increase of 13.7% in sales volume, particularly in medical touchscreens, multi-functional printer touchscreens, industrial control computer touchscreens, automotive touchscreens, POS touchscreens and POS touchscreens, (ii) 0.1% positive impact from exchange rate due to appreciation of RMB against US dollars partially offset by (iii) a decrease of 0.6% in the average RMB selling price of our products in the domestic market, and (iii), compared with those of the same period in 2024. As for the RMB selling price, the decrease of 0.6% was mainly due to the lower demand of higher selling priced products of touchscreen machines in the PRC domestic market, including the decreased average RMB selling price of 4.9% in medical touchscreens and 1.7% in automotive touchscreens, partially offset by the increased average RMB selling price of 7.0% in POS touchscreens during the year ended December 31, 2025. The Company has taken proactive efforts to market new models and efforts to obtain new customers in existing markets, our sales increased by 9.7% in South China, and 10.6% in East China, and 17.9% in Southwest China during the year ended December 31, 2025. 55 Overseas Market For the year ended December 31, 2025, revenues from overseas market was $14.2 million as compared to $14.9 million of the same period of 2024, representing a decrease by $0.7 million, or 4.9%, mainly due to i) a decrease of 6.0% in sales volume due to decreased sales in gaming touchscreens and industrial control computer touchscreens, partially offset by (ii) an increase of 1.0% in average selling price in RMB, and (iii) 0.1% positive impact from exchange rate due to appreciation of RMB against US dollars, compared with those of the same period of 2024. The following table summarizes the breakdown of revenues by categories in US dollars: 15.6% Change Change Amount % Amount % Amount Margin % (in US Dollars, except percentage) Product categories by end applications Automotive Touchscreens $ 11,625,160 25.7 % $ 11,513,813 27.2 % $ 111,347 1.0 % Industrial Control Computer Touchscreens 9,242,812 20.5 % 8,212,232 19.4 % 1,030,580 12.5 % POS Touchscreens 7,042,632 15.6 % 6,255,175 14.8 % 579,909 9.0 % Medical Touchscreens 7,041,187 15.6 % 6,282,892 14.9 % (250,348 ) (4.0 )% Gaming Touchscreens 6,032,544 13.4 % 6,462,723 15.3 % 786,011 12.6 % Multi-Functional Printer Touchscreens 4,152,483 9.2 % 3,553,539 8.4 % 598,945 16.9 % Total Revenues $ 45,136,818 100.0 % $ 42,280,373 100.0 % $ 2,856,445 6.6 % * 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 automotive touchscreens to high-end products such as industrial control computer touchscreens, gaming touchscreens, POS touchscreens, and multi-functional printer touchscreens, primarily due to (i) greater growth potential of computer screen models in China, (ii) the stronger demand on higher-end touch screens made with better materials and better quality. Gross Profit and Gross Profit Margin Years Ended December 31, Change (in millions, except percentage) 2025 2024 Amount % Gross Profit $ 14.4 $ 13.6 $ 0.8 5.9 % Gross Profit Margin 31.8 % 32.2 % (0.4 )% Gross profit was $14.4 million during the year ended December 31, 2025, compared to $13.6 million in the same period in 2024. Our gross profit margin decreased to 31.8% during the year ended December 31, 2025 as compared to 32.2% for the same period of 2024, primarily due to i) an increase of 7.0% in cost of goods sold, mainly in an increase of 3.9% in labor costs due to additional hiring of technicians, and an increase of 5.7% in costs of materials, among which the chip cost accounted for 11.1%, and ii) sales discount of $1.2 million (accounted for 2.6% of the revenues) to certain long-term customers at year-end of 2025, partially offset by the increase of revenue by 6.8%, particularly high-end products such as industrial control computer touchscreens, POS touchscreens, medical touchscreens, and multi functional printer touchscreens during the year ended December 31, 2025. Selling Expenses Years Ended December 31, Change (in millions, except percentage) 2025 2024 Amount % Selling Expenses $ 0.6 $ 0.8 $ (0.2 ) (25.0 )% as a percentage of revenues 1.3 % 1.9 % (0.6 )% Selling expenses were $0.6 million for the years ended December 31, 2025, compared to $0.8 million in the same period in 2024, representing a decrease of $0.2 million, or 25.0%, primarily due to the continued decrease in traveling and transportation expenses as our selling and marketing team continued the practice of online client communications to promote sales since end of 2024. 56 General and Administrative Expenses Years Ended December 31, Change (in millions, except percentage) 2025 2024 Amount % General and Administrative Expenses $ 3.8 $ 3.5 $ 0.3 8.6 % as a percentage of revenues 8.4 % 8.3 % 0.1 % General and administrative expenses were $3.8 million for the year ended December 31, 2025, compared to $3.5 million in the same period in 2024, representing an increase of $0.3 million, or 8.6%. The increase was primarily due to the increase of $0.3 million in professional fees, $0.1 million in allowance for credit loss, $0.2 million in impairment loss of construction in progress, and $0.4 million in amortization of right-of-use assets, and $0.1 million of payroll expenses, partially offset by the decrease of $0.9 million of amortization of prepaid marketing research fees (see Note 4 of the accompanying financial statements). Operating Income Total operating income was $10.0 million for the year ended December 31, 2025 as compared to $9.3 million of the same period in 2024, primarily due to higher gross profit and lower selling expenses, partially offset by higher general & administration expenses Gain (loss) on Changes in Fair Value of Common Stock Purchase Warrants Years Ended December 31, Change (in US dollars, except percentage) 2025 2024 Amount % Gain on changes in fair value of common stock purchase warrants $ - $ 378,371 $ (378,371 ) (100.0 )% as a percentage of revenues 0.0 % 0.9 % (0.9 )% In connection with the issuance of convertible promissory notes in October, November and December, 2021, the Company also issued seven (7) three-year warrant (the “Note Warrants”) to purchase an aggregate of 1,800,000 shares of the Company’s common stock (the “Warrant Shares”) (see NOTE 11 — CONVERTIBLE PROMISSORY NOTES PAYABLE- b) Warrants). The Note Warrant was valid for three years and expired during the year ended December 31, 2024. We recorded gain of $378,371 on changes in fair value of common stock purchase warrants for the year ended December 31, 2024. Income Taxes Years Ended December 31, Change (in millions, except percentage) 2025 2024 Amount % Income before Income Taxes $ 10.2 $ 8.7 $ 1.5 17.2 % Income Tax Expense (3.0 ) (2.7 ) (0.3 ) 11.1 % Effective income tax rate 29.5 % 30.6 % (1.1 )% Under PRC CIT Law, domestic enterprises and foreign investment enterprises (the “FIEs”) are usually subject to a unified 25% enterprise income tax rate. The Company’s PRC subsidiary Sichuan Vtouch is subject to a 25% income tax rate. The effective income tax rate for the year ended December 31, 2025 and 2024 stayed at 29.5% and 30.6%, respectively. Our PRC subsidiary had $118.4 million of cash of December 31, 2025, which are planned to be indefinitely reinvested in our business operations in the PRC. The distributions from our PRC subsidiary to our stockholders 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 subsidiary. Net Income As a result of the above factors, we had a net income of $7.2 million in the year ended December 31, 2025compared to a net income of $6.0 million in the same period of 2024. 57 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, 2025, we had current assets of $126.1 million, consisting of $118.4 million in cash, $6.5 million in accounts receivable, $45,202 in inventories, and $1.2 million in prepaid expenses and other current assets Our current liabilities as of December 31, 2025 were $3.2 million, which is comprised of $1.1 million in accounts payable, $0.3 million in amounts due to a related party, $1.4 million in accrued expenses and other current liabilities. and $0.5 million in operating lease liabilities, current portion. The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the years ended December 31 , 2025 and 2024: Years Ended December 31, (in US Dollar millions) 2025 2024 Net cash provided by operating activities $ 7.4 $ 1.1 Net cash used in investing activities (0.3 ) (0.3 ) Net cash provided by financing activities - 7.6 Effect of foreign currency exchange rate changes on cash and cash equivalents 7.5 (2.7 ) Net increase in cash and cash equivalents 14.6 5.7 Cash and cash equivalents at the beginning of period 103.8 98.0 Cash and cash equivalents at the end of period $ 118.4 $ 103.8 Operating Activities Net cash provided by operating activities was $7.4 million for the year ended December 31, 2025, as compared to $1.1 million provided by operating activities for the same period in 2024, representing an increase of $6.3 million, or 572.7%. The positive cash flow of $7.4 million for the year ended December 31, 2025 was primarily due to i) $7.2 million net income, ii) $0.2 million impairment loss of construction in progress and $0.6 million of amortization of operating right-of-use assets, iii) the decrease of $1.3 million in accounts receivable, net, $1.6 million in prepaid expenses and current assets, iii) the increase of $0.1 million in amounts due to a related party, $0.4 million in accrued expenses and current liabilities, and $0.6 million in operating lease liabilities, partially offset by iv) the increase of $4.4 million in long-term prepayment, reclassified from construction in progress due to delayed schedule, and the decrease of $0.2 million in accounts payable. The positive cash flow for the year ended December 31, 2024 was primarily due to i) $6.0 million net income during the year ended December 31, 2024, ii) the increase of $0.6 million in accounts payable and $0.1 million in amounts due to a related party, partially offset by iii) the decrease of $0.4 million gain on changes in fair value of common stock purchase warrants liability, $0.3 million in accounts receivable and $1.8 million in prepaid expenses and other current assets (mainly in prepaid $0.9 million of consulting service fees), and iv) the decrease of $3.3 million in accrued expenses and other current liabilities. Investing Activity Net cash used in investing activities for the year ended December 31, 2025 and 2024 stayed at $0.3 million, respectively, representing the purchase of property, plant and equipment and construction in progress. 58 Financing Activities There was no cash flow in financing activities for the year ended December 31, 2025. Net cash provided by financing activities for the year ended December 31, 2024 was $7.6 million, including $9.0 million in net proceeds from the 2024 Uplisting Offering, partially offset by $1.4 million repayment of convertible promissory notes. As of December 31, 2025, our cash and cash equivalents were $118.4 million, as compared to $103.8 million at December 31, 2024. Days Sales Outstanding (“DSO”) has decreased to 56 days for the year ended December 31, 2025 from 64 days for the year ended December 31, 2024. The majority of the Company’s revenues and expenses were denominated 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. The majority of the Company’s revenues and expenses were denominated 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. Holding Company Structure Wetouch is a holding company incorporated in Nevada with no material operations of its own. We conduct substantially all of our operations through our subsidiary established in mainland China. Our equity structure is a direct holding structure, that is, Wetouch, a Nevada corporation listed in the U.S., controls Sichuan Vtouch though BVI Wetouch. See “Item 1. Business – Corporate History and Structure ” for more details. We face various risks and uncertainties relating to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, which may impact our ability to conduct certain businesses, accept foreign investments, or list and conduct offerings on a United States or other foreign exchange. 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 continue to offer securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks relating to doing business in China, see “ Item 1.A. Risk Factors—Risks Related to Doing Business in China .” The PRC government’s significant discretion and authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of our securities to significantly decline or become worthless. For more details, see “ Item 1.A. Risk Factors—Risks Relating to Doing Business in China— 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 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 .” 59 Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and cause our Common Stock to decrease in value or become worthless. For more details, see “ Item 1.A. Risk Factors—Risks Relating to Doing Business in China— 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 China, could adversely affect us and limit the legal protections available to you and us .” Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries As of March 31, 2026, Wetouch made cumulative capital contributions of RMB348.0 million (US$ 49.8 million) to its PRC subsidiary through intermediate holding companies and were accounted as long-term investments of Wetouch. As of the date of this Annual Report, these funds have been used by the Company’s PRC subsidiary for its operations. To date, there have not been any dividends or other distributions from our PRC subsidiary to Wetouch. Wetouch, as a holding company, may rely on dividends and other distributions on equity paid by its PRC subsidiary for its cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to its stockholders, subject to Wetouch’s charter and Nevada law, or to service any expenses and other obligations it may incur. Within our direct holding structure, the cross-border transfer of funds from Wetouch to its PRC subsidiary is permitted under laws and regulations of the PRC currently in effect. Specifically, Wetouch is permitted to provide funding to its PRC subsidiary in the form of shareholder loans or capital contributions, subject to satisfaction of applicable government registration, approval and filing requirements in China. There are no quantity limits on Wetouch’s ability to make capital contributions to its PRC subsidiary under the PRC law and regulations. However, the PRC subsidiary may only procure stockholder loans from HK Wetouch in an amount equal to the difference between its registered capital and total investment amount as recorded in the Chinese Foreign Investment Comprehensive Management Information System or 2.5 times of its net assets, at the discretion of such PRC subsidiary. For additional information, see “ Item 1.A. Risk Factors—Risks Related to Doing Business in China —PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of any offerings or financings 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 .” The PRC Enterprise Income Tax Law (the “EIT Law”) and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by PRC companies to non-PRC-resident enterprises unless reduced under treaties or arrangements between the PRC central government and the governments of other countries or regions where the non-PRC resident enterprises are tax resident. Pursuant to the tax agreement between mainland China and the Hong Kong Special Administrative Region, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10%. However, if the relevant tax authorities determine that our transactions or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Accordingly, there is no assurance that the reduced 5% withholding rate will apply to dividends received by our Hong Kong subsidiary from our PRC subsidiaries. This withholding tax will reduce the amount of dividends we may receive from our PRC subsidiaries. There is no assurance that the PRC government will not intervene or impose restrictions on the ability of us or our subsidiary to transfer cash. Most of our cash is in Renminbi, and the PRC government could prevent the cash maintained in our bank accounts in mainland China from leaving mainland China, could restrict deployment of the cash into the business of our subsidiaries and restrict the ability to pay dividends. For details regarding the restrictions on our ability to transfer cash between us, and our subsidiaries, see “ Item 1A. Risk Factors—Risks Related to Doing Business in China — Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment .” We currently do not have cash management policies that dictate how funds are transferred between our holding company and our subsidiaries. 60 Restrictions on Our Ability to Transfer Cash Out of China and to U.S. Investors Our PRC subsidiary’s ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC subsidiary to pay dividends to its shareholders only out of its accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, under PRC law, our PRC subsidiary is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. These reserves are not distributable as cash dividends. If our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to Wetouch. To address persistent capital outflows and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, implemented a series of capital control measures in the subsequent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. The PRC government may continue to strengthen its capital controls and our PRC subsidiary’s dividends and other distributions may be subject to tightened scrutiny in the future. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of mainland China. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. 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. Capital Expenditure Commitment As of December 31, 2025, the Company had commitment of RMB7.3 million (equivalent to $1.05 million) for construction in progress. Off-Balance Sheet Arrangements We had no off- balance sheet arrangements as of December 31, 2025. 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. 61 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 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, 2025 and 2024, 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. 62 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, 2025 and 2024 are disclosed in Note 16 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, operating lease, 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. Reversal of obsolete inventory and write-off inventory were $36,971 and $54,873 were recorded for the years ended December 31, 2025 and 2024, 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. The Company analyzes 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; 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 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. On February 23, 2024, immediately upon the closing of the 2024 Public Offering, the Company made a full payment to the remaining five outstanding promissory notes. (see details in NOTE 11 – CONVERTIBLE PROMISSORY NOTES PAYABLE-a) Convertible promissory notes). There were no convertible promissory notes as of December 31, 2024. 63 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 Note Warrants (as defined in NOTE 11 – CONVERTIBLE PROMISSORY NOTES PAYABLE – ii) Warrants) issued in October, 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. The Note Warrant (see details in NOTE 11 – CONVERTIBLE PROMISSORY NOTES PAYABLE-b) Note Warrant) was issued in 2021 which was valid for three years and expired during the year ended December 31, 2024. The Company recorded nil and $378,371 gain on changes of fair value of common stock purchase warrant liability for the year ended December 31, 2025 and 2024, 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, 2025 and 2024. The Company believes that there were no uncertain tax positions as of December 31, 2025 and 2024. The Company’s operating subsidiary Sichuan Vtouch in China is subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the fiscal years ended December 31, 2025 and 2024. As of December 31, 2025 and 2024, all of the Company’s tax returns of its PRC Subsidiaries remain open for statutory examination by PRC tax authorities. 64 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 Vehicles 4 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 (loss) as other income or expenses. Construction in progress, funded by Company’s working capital, represents manufacturing facilities and office building under construction, is stated at cost and transferred to property, plant and equipment when it is substantially ready for its intended use. No depreciation is recorded for construction in progress. The management estimate that construction in progress for our new facilities will be completed by the first half of 2027 and will transfer construction in progress to property, plant and equipment to start depreciation. Land use right, net A land use right in the PRC represents an exclusive right to occupy, use and develop a piece of land during the contractual term of the land use right. Land use right is usually paid in one lump sum at the date the right is granted or at the date of the prepayment pursuant to the land use right transfer contract with the local government. The prepayment usually covers the entire duration period of the land use right. The lump sum advance payment is capitalized and recorded as land use right and then charged to expense on a straight-line basis over the period of the right. On August 6, 2021, Sichuan Vtouch entered into a contract with Chengdu Wenjiang District Planning and Natural Resources Bureau (“Wenjiang Bureau”) for the purchase of a land use right of a parcel of land of 131,010 square feet (12,171. 28 square meters) for a consideration of RMB3,925,234 (equivalent to $561,301) for the Company’s new facility. The Company paid the consideration in full by November 18, 2021 and recorded in the prepayment. Pursuant to the contract, Sichuan Vtouch will construct a new facility on this parcel according to the specifications. Once the Project is fully completed, Wenjiang Bureau shall transfer the title of land use right to Sichuan Vtouch for 20 years. The Company’s new facility started in August 2021 yet was delayed and suspended due to the outbreak of Covid-19 and government-ordered shutdowns in China. The Company has rescheduled and extended the completion by first half of 2027 with the production at the new facilities will commencing by the end of 2027. During the years ended December 31, 2025, management assessed the probability of the obtaining the land use right upon the completion of the new facility, reclassified prepayment of RMB3,925,234 (equivalent to $561,301) to land use right, started the amortization by a useful life of approximately 16 years. The amortization expense of land use rights was US$16,718 for the years ended December 31, 2025, and included in general and administrative expenses. 65 Fair value measurement Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. Authoritative literature provides a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement as follows: Level 1 Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2 Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. When available, the Company uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Company will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. 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 was $175,426 and nil impairment of construction in progress recognized for the years ended December 31, 2025 and 2024, respectively. 66 Lease The Company adopts ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) for all periods presented. The Company elects the short-term lease exemption for all contracts with lease terms of 12 months or less. Under the guidance of AUS 2016-02, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The Company’s lease terms include options to renew or terminate the lease when it is reasonably certain that it will exercise the option. The Company determines if a contract contains a lease based on whether it has the right to obtain substantially all of the economic benefits from the use of an identified asset which the Company does not own and whether it has the right to direct the use of an identified asset in exchange for consideration. Right of use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are recognized as the amount of the lease liability, adjusted for lease incentives received. Lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate (“IBR”), because the interest rate implicit in most of the Company’s leases is not readily determinable. The IBR is a hypothetical rate based on the Company’s understanding of what its credit rating would be to borrow and resulting interest the Company would pay to borrow an amount equal to the lease payments in a similar economic environment over the lease term on a collateralized basis. Lease payments may be fixed or variable, however, only fixed payments or in-substance fixed payments are included in the Company’s lease liability calculation. Variable lease payments are recognized in operating expenses in the period in which the obligation for those payments is incurred. The lease right-of-use assets are initially measured at the carrying amount of the lease liability and adjusted for any prepaid or accrued lease payments, remaining balance of lease incentives received, unamortized initial direct costs, or impairment charges relating to the right-of-use-asset. Lease expense for minimum lease payments exclusive of the value-added tax are recognized on straight-line basis over the lease term The new standard provides a number of optional practical expedients at transition. The Company elected certain practical expedients that must be elected as a package, which permit the Company to not reassess, under the new standard, prior conclusions about (1) lease identification, (2) lease classification and (3) initial direct costs. Additionally, the Company elected a short-term lease exception policy, which allows entities to not apply Topic 842 to short-term leases (i.e. leases with terms of 12 months or less) and a hindsight policy, which allows an entity to include current considerations for existing leases when determining initial lease terms. The Company has also elected to account for lease and non-lease components as a single component for all leases, and elected to utilize an IBR (incremental borrowing rate) that is risk free rate plus premium for all leases when calculating the lease liability. 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 October 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-06, Disclosure Improvements—codification amendments in response to SEC’s disclosure Update and Simplification initiative which amend the disclosure or presentation requirements of codification subtopic 230-10 Statement of Cash Flows—Overall, 250-10 Accounting Changes and Error Corrections—Overall, 260-10 Earnings Per Share—Overall, 270-10 Interim Reporting—Overall, 440-10 Commitments—Overall, 470-10 Debt—Overall, 505-10 Equity—Overall, 815-10 Derivatives and Hedging—Overall, 860-30 Transfers and Servicing—Secured Borrowing and Collateral, 932-235 Extractive Activities—Oil and Gas—Notes to Financial Statements, 946-20 Financial Services—Investment Companies—Investment Company Activities, and 974-10 Real Estate—Real Estate Investment Trusts—Overall. The amendments represent changes to clarify or improve disclosure and presentation requirements of above subtopics. Many of the amendments allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the SEC’s requirements. Also, the amendments align the requirements in the Codification with the SEC’s regulations. For entities subject to existing SEC disclosure requirements or those that must provide financial statements to the SEC for securities purposes without contractual transfer restrictions, the effective date aligns with the date when the SEC removes the related disclosure from Regulation S-X or Regulation S-K. Early adoption is not allowed. For all other entities, the amendments will be effective two years later from the date of the SEC’s removal. 67 ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, establishes incremental disaggregation of income tax disclosures pertaining to the effective tax rate reconciliation and income taxes paid. This standard is effective for fiscal years beginning after December 15, 2024, and requires prospective application with the option to apply it retrospectively. The Company adopted ASU 2023-09 beginning January 1, 2025. The adoption did not have a material impact on the Company’s consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, “Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses,” requiring public entities to disclose additional information about specific expense categories in the notes to the financial statements on an interim and annual basis. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and for interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2024-03. Management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Please see the financial statements beginning on page F-1 following the signature pages in this Annual Report on Form 10-K and incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable.