Wetouch Technology Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The discussion should be read in conjunction with the Company’s consolidated financial statements and the notes presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from those expressed, implied or anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission. For more information regarding the risks and uncertainties of our business, See “Risk Factors”, “Cautionary Note Regarding Forward Looking Statement.” Overview The Company is a Nevada holding company with no material operations of its own. We conduct substantially all of our operations through our subsidiary in mainland China, which we control through BVI Wetouch. See “Item 1. Business – Corporate History and Structure” for more details. Because our operations are primarily in China, we are subject to complex and evolving PRC laws and regulations. These include restrictions on capital flows, dividend payments, currency conversion, cybersecurity and data privacy, and governmental discretion over overseas securities offerings. These risks could materially affect our ability to transfer funds, conduct offerings, or continue operations in their current form. See “Item 1A. Risk Factors—Risks Related to Doing Business in China.” As of June 30, 2026, the Company has contributed RMB 348.0 million (US$51.3 million) to its PRC subsidiary through intermediate holding companies, which were accounted for as long-term investments. These funds have been used by our PRC subsidiary in its operations. To date, no dividends or other distributions have been made by our PRC subsidiary to the Company. We may rely on future distributions from our PRC subsidiary to fund our holding company obligations, subject to PRC law and restrictions. For more details, see “ Item 1A. Risk Factors—Risks Related to Doing Business in China—As a holding company, we conduct our operations primarily through our PRC subsidiary and face risks and uncertainties associated with this structure. ” Under current PRC law, dividend payments by our PRC subsidiary are limited to accumulated profits determined in accordance with PRC accounting standards and are subject to statutory reserve requirements. Dividends to the Company are also subject to withholding tax, generally 10%, but reduced to 5% if treaty conditions are met. There is no assurance that the reduced rate will apply. For more details, see “ Item 1A. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system, including the enforcement of laws and changes in laws and regulations, could adversely affect us and limit the legal protections available .” We currently do not have cash management policies dictating how funds are transferred between the Company and its subsidiaries. Most of our cash is maintained in Renminbi in mainland China and may be subject to PRC restrictions on outbound transfers. For details, 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. ” 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 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. 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 client base, although our revenues remain concentrated among a limited number of major customers, as described in Note 13 to the condensed consolidated financial statements. For the three months ended June 30, 2026 and 2025, our domestic sales accounted for approximately 68.6% and 67.7%, respectively, of our revenues, and our international sales accounted for approximately 31.4% and 32.3%, respectively, of our revenues. For the six months ended June 30, 2026 and 2025, our domestic sales accounted for approximately 68.0% and 67.5%, respectively, of our revenues, and our international sales accounted for approximately 32.0% and 32.5%, respectively, of our revenues.. Since our incorporation, we have effected two reverse stock splits of our common stock, including a 1-for-70 reverse split in 2020 and a 1-for-20 reverse split in 2023, and all share and per share information in this Quarterly Report has been retroactively adjusted to reflect these actions. For more details, see “ Item 1. Business - Corporate History and Structure - Reverse Stock Splits ” of the 2025 Form 10-K. 2 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 Quarterly 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 $14.8 million and $9.1 million have been recorded in the construction in progress as of June 30, 2026. 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 three-month period ended June 30, 2026 include: ● Revenues were $14.0 million, an increase of 12.9% compared to $12.4 million in the second quarter of 2025 ● Gross profit was $4.9 million, an increase of 19.5% compared to $4.1 million in the second quarter of 2025 ● Gross profit margin was 34.9 %, compared to 33.1% in the second quarter of 2025 ● Net income stayed flat at $2.2 million in the second quarter of 2026 and 2025 ● Total volume shipped was 663,555 units, an increase of 7.8% compared to 615,742 units in the second quarter of 2025 Results of Operations The following table sets forth, for the periods indicated, statements of income data: For the Three Months Ended June 30, Change For the Six Months Ended June 30, Change (in US Dollar millions, except percentage) 2026 2025 % 2026 2025 % Revenues $ 14.0 $ 12.4 12.9 % $ 30.3 $ 27.7 9.4 % Cost of revenues (9.1 ) (8.3 ) 9.6 % (19.6 ) (18.0 ) 8.9 % Gross profit 4.9 4.1 19.5 % 10.7 9.7 10.3 % Total operating expenses (1.7 ) (1.0 ) 70.0 % (2.4 ) (2.7 ) (11.1 )% -Share-based compensation expenses (1.0 ) 0.0 N/A (1.0 ) 0.0 N/A Operating income 3.2 3.1 3.2 % 8.3 7.1 16.9 % Income before income taxes 3.2 3.1 3.2 % 8.3 7.1 16.9 % Income tax expense (1.0 ) (0.9 ) 11.1 % (2.3 ) (2.3 ) 0.0 % Net income $ 2.2 $ 2.2 0.0 % $ 6.0 $ 4.8 25.0 % 3 Three Months Ended June 30, 2026 Compared to Three Months Ended June 30, 2025 Revenues We generated revenue of $14.0 million for the three months ended June 30, 2026, an increase of $1.6 million, or 12.9%, compared to $12.4 million in the same period of last year. This was due to an increase of 7.8% in sales volume, and 6.0% positive impact from exchange rate due to appreciation of RMB against US dollars, partially offset by a decrease of 1.7% in the average selling price of our products in RMB compared with that of the same period of last year. For the Three-Month Ended June 30, 2026 2025 Change Change Amount % Amount % Amount % (in US Dollar millions except percentage) Revenue from sales to customers in Mainland China $ 9.6 68.6 % $ 8.4 67.7 % $ 1.2 14.3 % Revenue from sales to customers overseas 4.4 31.4 % 4.0 32.3 % 0.4 10.0 % Total Revenue $ 14.0 100 % $ 12.4 100 % $ 1.6 12.9 % For the Three-Month Ended June 30, 2026 2025 Change Change Unit % Unit % Unit % (in UNIT, except percentage) Units sold to customers in Mainland China 441,200 66.5 % 411,353 66.8 % 29,847 7.3 % Units sold to customers overseas 222,355 33.5 % 204,389 33.2 % 17,966 8.8 % Total Units Sold 663,555 100.0 % 615,742 100 % 47,813 7.8 % (i) PRC Domestic Market For the three months ended June 30, 2026, revenue from the PRC domestic market increased by $1.2 million, or 14.3%, as a combined result of (i) an increase of 7.3% in sales volume in all types of touchscreen products in the PRC market, (ii) an increase of 0.3% in the average selling price of our products in RMB, and (iii) 6.0% positive impact from exchange rate due to appreciation of RMB against US dollars, compared with that of the same period of last year As for the RMB selling price, the increase of 0.3% was mainly due to the higher demand of higher selling priced products of touchscreen machines such as automotive touchscreens and industrial control computer touchscreens in the PRC market, yet the overall price change was not significant during the three-month period ended June 30, 2026, as compared to the same period of last year. Due to our proactive efforts to market new models and efforts to obtain new customers and penetrate into new regions, our sales increased by 8.6% in East China, 7.1% in South China and 6.3% in Southwest China, during the three months ended June 30, 2026, as compared to the same period of last year. 4 (ii) Overseas Market For the three-month period ended June 30, 2026, revenues from the overseas market were $4.4 million as compared to $4.0 million of the same period of 2025, representing an increase by $0.4 million, or 10.0%, primarily due to (i) 8.8% increase in sales volume because of higher demand on automotive touchscreens and gaming touchscreens, and (ii) 6.0% positive impact from exchange rate due to appreciation of RMB against US dollars, partially offset by a decrease of 5.8% in the average selling price of our products in RMB compared with that of the same period of last year. compared to the same period of last year. The following table summarizes the breakdown of revenues by categories in US dollars: For the Three-Month Ended June 30, 2026 2025 Change Change Amount % Amount % Amount Margin% (in US Dollars, except percentage) Product categories by end applications Automotive Touchscreens $ 3,535,561 25.2 % $ 3,122,908 25.1 % $ 412,653 13.2 % Industrial Control Computer Touchscreens 2,948,953 21.1 % 2,729,429 22.0 % 219,524 8.0 % POS Touchscreens 2,272,863 16.2 % 1,950,702 15.7 % 322,161 16.5 % Gaming Touchscreens 2,025,119 14.5 % 1,800,926 14.5 % 224,193 12.4 % Medical Touchscreens 1,914,237 13.7 % 1,665,087 13.4 % 249,150 15.0 % Multi-Functional Printer Touchscreens 1,304,558 9.3 % 1,150,403 9.3 % 154,155 13.4 % Total Revenue $ 14,001,291 100.0 % $ 12,419,455 100.0 % $ 1,581,836 12.7 % The Company continued to shift production mix from traditional lower-end products to high-end products such as medical touchscreens, gaming touchscreen, automotive touchscreens, POS touchscreens, and multi-functional printer touchscreens, primarily due to (i) greater growth potential of computer screen models in China and overseas market, and (ii) the stronger demand on higher-end touch screens made with better materials and better quality. Gross Profit and Gross Profit Margin For the Three-Month Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % Gross Profit $ 4.9 $ 4.1 $ 0.8 19.5 % Gross Profit Margin 34.9 % 33.1 % 1.8 % Gross profit was $4.9 million in the second quarter ended June 30, 2026, compared to $4.1 million in the same period of 2025. Our gross profit margin increased to 34.9% for the second quarter of 2026, as compared to 33.1% for the same period of 2025, primarily due to the increase of sales of 12.9%, particularly high-end products such as the profit margin increased by 3.33% in industrial computer control touchscreens sold in PRC market, and partially offset by an increase of 3.4% in labor costs due to additional hiring of technicians, and an increase of 2.2% in costs of materials (mainly in the price of chip costs) during the three months ended June 30, 2026. 5 Selling Expenses For the Three-Month Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % Selling Expenses $ 0.2 $ 0.1 $ 0.1 100.0 % as a percentage of revenues 1.4 % 0.8 % 0.6 % Selling expenses were $0.2 million for the three-month period ended June 30, 2026, compared to $0.1 million in the same period in 2025, representing an increase of $0.1 million. The increase was primarily due to the increase of traveling expenses visiting clients during the three months ended June 30, 2026. General and Administrative Expenses For the Three-Month Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % General and Administrative Expenses $ 0.5 $ 0.9 $ (0.4 ) (44.4 )% as a percentage of revenues 3.6 % 7.3 % (3.7 )% General and administrative expenses were $0.5 million for the three-month period ended June 30, 2026, compared to $0.9 million in the same period in 2025, representing a decrease of $0.4 million, or 44.4%. The decrease was primarily due to the absence in the second quarter of 2026 of approximately $0.4 million of amortization expense related to prepaid three-year consulting service fees that was expired on May 31, 2025, partially offset by an increase of approximately $0.1 million in professional fees during the second quarter of 2026. Share-based Compensation Expenses For the Three-Month Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % Share-based Compensation Expenses $ 1.0 $ 0.0 $ 1.0 N/A as a percentage of revenues 7.1 % 0.0 % 7.1 % Share-based compensation expenses were $1.0 million for the three-month period ended June 30, 2026, compared to nil in the same period in 2025, representing an increase of $1.0 million. On May 11, 2026, the Compensation Committee of the Board approved the grant of 600,000 common stock to three independent consultants who contribute to the success of the Company’s operations in overseas market. The Award vested immediately upon grant, with the fair value of vested shares determined by the market closing price of common stock at the grant date. Accordingly, the Company recorded share-based compensation expenses of $1,032,000 for the three and three months ended June 30, 2026 (see Note 12). Operating Income Total operating income was $3.2 million for the three-month period ended June 30, 2026 as compared to $3.1 million of the same period of last year, primarily due to higher revenues and gross profit, and lower general and administrative expenses, partially offset by the higher selling expenses and share-based compensation expenses for the three-month period ended June 30, 2026. 6 Income Taxes For the Three-Month Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % Income before Income Taxes $ 3.2 $ 3.1 $ 0.1 3.2 % Income Tax (Expense) (1.0 ) (0.9 ) (0.1 ) 11.1 % Effective income tax rate 32.1 % 28.1 % 4.0 % The effective income tax rates for the three-month period ended June 30, 2026 and 2025 were 32.1% and 28.1%, respectively. Net Income As a result of the above factors, our net income stayed flat at $2.2 million for the second quarter of 2026 and 2025, respectively. Results of Operations - Six Months Ended June 30, 2026 Compared to Six Months Ended June 30, 2025 Revenues We generated revenue of $30.3 million for the six months ended June 30, 2026, an increase of $2.6 million, or 9.4%, compared to $27.7 million in the same period of last year. This was mainly due to an increase of 3.5% in sales volume, an increase of 3.5% in the average RMB selling price of our products, and 5.4% positive impact from exchange rate due to appreciation of RMB against US dollars, compared with those of the same period of last year. For the Six Months Ended June 30, 2026 2025 Change Change Amount % Amount % Amount % (in US Dollar millions except percentage) Revenue from sales to customers in PRC $ 20.6 68.0 % $ 18.7 67.5 % $ 1.9 10.2 % Revenue from sales to customers overseas 9.7 32.0 % 9.0 32.5 % 0.7 7.8 % Total Revenues $ 30.3 100 % $ 27.7 100 % $ 2.6 9.4 % For the Six Months Ended June 30, 2025 Change Change Unit % Unit % Unit % (in UNIT, except percentage) Units sold to customers in PRC 944,500 66.2 % 920,003 66.7 % 24,497 2.7 % Units sold to customers overseas 482,380 33.8 % 458,284 33.3 % 24,096 5.3 % Total Units Sold 1,426,880 100 % 1,378,287 100 % 48,593 3.5 % 7 (i) PRC market For the six months ended June 30, 2026, revenue from PRC market increased by $1.9 million or 10.2% as a combined result of (i) an increase of 2.7% in sales volume, particularly in industrial control computer touchscreens, POS touchscreens, multi-function printer touchscreens and multi-functional printer touchscreens, (ii) an increase of 1.6% in the average RMB selling price of our products, and (iii) 5.4% positive impact from exchange rate due to appreciation of RMB against US dollars, compared with those of the same period of last year. As for the RMB selling price, the increase of 1.6% was mainly due to the higher demand of higher selling priced products of touchscreen machines in the PRC domestic market, including the increase in average RMB selling price of 5.6% in medical touchscreens, 0.9% in automotive touchscreens, and partially offset by the decrease in average RMB selling price of 0.1% in POS touchscreens and multi-functional printer touchscreens during the six-month period ended June 30, 2026. The Company has taken proactive efforts to market new models and efforts to obtain new customers and penetrate into new regions, our sales increased by 7.8% in Southwest China, and 2.8% in East China, and 2.2% in South China during the six-month period ended June 30, 2026. (ii) Overseas market For the six months ended June 30, 2026, revenues from the overseas market were $9.7 million as compared to $9.0 million of the same period of 2025, representing an increase by $0.7 million, or 7.8%, primarily due to (i) 5.3% increase in sales volume because of higher demand on automotive touchscreens and gaming touchscreens, partially offset by the decrease in medical touchscreens, and (ii) 5.4% positive impact from exchange rate due to appreciation of RMB against US dollars, partially offset by a decrease of 3.2% in the average selling price of our products in RMB compared with that of the same period of last year. compared to the same period of last year The following table summarizes the breakdown of revenues by categories in US dollars : Revenues For the Six Months Ended June 30, 2026 2025 Change Change Amount % Amount % Amount Margin% (in US Dollars, except percentage) Product categories by end applications Automotive Touchscreens $ 7,865,662 25.9 % $ 7,083,405 25.6 % $ 782,257 11.0 % Industrial Control Computer Touchscreens 6,256,131 20.6 % 5,964,502 21.5 % 291,629 4.9 % POS Touchscreens 4,761,227 15.7 % 4,361,733 15.7 % 399,494 9.2 % Gaming Touchscreens 4,358,941 14.4 % 4,121,519 14.9 % 237,422 5.8 % Medical Touchscreens 4,308,003 14.2 % 3,614,745 13.0 % 693,258 19.2 % Multi-Functional Printer Touchscreens 2,763,496 9.1 % 2,563,129 9.3 % 200,367 7.8 % Total Revenues $ 30,313,460 100 % $ 27,709,033 100 % $ 2,604,427 9.4 % The Company continued to shift production mix from traditional lower-end products such as touchscreens used in industrial control computer industries to high-end products such as medical touchscreens, automotive touchscreens and POS 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. 8 Gross Profit and Gross Profit Margin For the Six Months Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % Gross Profit $ 10.7 $ 9.7 $ 1.0 10.3 % Gross Profit Margin 35.3 % 35.2 % 0.1 % Gross profit was $10.7 million during the six months ended June 30, 2026, compared to $9.7 million in the same period of 2025. Our gross profit margin increased to 35.3% for the six months ended June 30, 2026, as compared to 35.2% for the same period of 2025, primarily due to the increase of revenues by 8.4%, particularly high-end products such as the increase of growth margin of 1.8% in automotive touchscreens, and 1.7% in industrial control computer touchscreens, partially offset by the increase in cost of goods sold by 2.4% for the six months ended June 30, 2026. Selling Expenses For the Six Months Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % Selling Expenses $ 0.3 $ 0.2 $ 0.1 50.0 % as a percentage of revenues 1.0 % 0.7 % 0.3 % Selling expenses were $0.3 million for the six-month period ended June 30, 2026, compared to $0.2 million in the same period in 2025, representing an increase of $0.1 million, or 50.0%. The increase was primarily due to increase of traveling expenses by sales team visiting clients to market the products during the six-month period ended June 30, 2026 General and Administrative Expenses For the Six Months Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % General and Administrative Expenses $ 1.1 $ 2.5 $ (1.4 ) (56.0 )% as a percentage of revenues 3.6 % 9.0 % (5.4 )% General and administrative (G&A) expenses were $1.1 million for the six months ended June 30, 2026, compared to $2.5 million in the same period in 2025, representing a decrease of $1.4 million, or 56.0%. The decrease was primarily due to the absence during the six months of 2026 of approximately $0.9 million of amortization expense related to prepaid three-year consulting service fees that was expired in May, 2025, and an increase of approximately $0.1 million in professional fees during the first half of 2026. Share-based Compensation Expenses For the Six-Month Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % Share-based Compensation Expenses $ 1.0 $ 0.0 $ 1.0 N/A as a percentage of revenues 3.3 % 0.0 % 3.3 % Share-based compensation expenses were $1.0 million for the six-month period ended June 30, 2026, compared to nil in the same period in 2025, representing an increase of $1.0 million. 9 On May 11, 2026, the Compensation Committee of the Board approved the grant of 600,000 common stock to three independent consultants who contribute to the success of the Company’s operations in overseas market. The Award vested immediately upon grant, with the fair value of vested shares determined by the market closing price of common stock at the grant date. Accordingly, the Company recorded share-based compensation expenses of $1,032,000 for the three and six months ended June 30, 2026 (see Note 12). Operating Income Total operating income was $8.3 million for the six months ended June 30, 2026 as compared to $7.1 million of the same period of last year due to higher gross profit, lower general and administrative expenses, partially offset by the higher selling expenses and share-based compensation expenses. Income Taxes For the Six Months Ended June 30, Change (in millions, except percentage) 2026 2025 Amount % Income before Income Taxes $ 8.3 $ 7.1 $ 1.2 16.9 % Income Tax (Expense) (2.3 ) (2.3 ) 0.0 % Effective income tax rate 27.3 % 32.8 % (5.5 )% The effective income tax rates for the six months ended June 30, 2026 and 2025 were 27.3% and 32.8%, respectively. Net Income As a result of the above factors, we had a net income of $6.0 million in the six months ended June 30, 2026 as compared to $4.8 million of the same period of last year Liquidity and Capital Resources Historically, our primary uses of cash have been to finance working capital needs. We expect to be able to meet our needs to fund operations, capital expenditures, and other commitments over the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings. However, we may require additional cash resources due to changes in business conditions or other future developments. If these sources prove insufficient to meet our cash requirements, we may seek to raise additional funds through the sale of equity or debt securities or by obtaining a credit facility. Any issuance of additional equity or equity-linked securities could dilute the ownership interests of existing shareholders, while the incurrence of additional indebtedness would increase our debt service obligations and could subject us to operating and financial covenants that may restrict our business activities. There can be no assurance that financing will be available in the necessary amounts, on terms acceptable to us, or at all. As of June 30, 2026, we had current assets of $138.0 million, consisting of $127.5 million in cash and cash equivalent, $9.3 million in accounts receivable, $9,185 in inventories, and $1.1 million in prepaid expenses and other current assets. Our current liabilities as of June 30, 2026 were $3.8 million, which is comprised of $0.9 million in accounts payable, $0.4 million in amounts due to a related party, $0.9 million income tax payable, $1.4 million in accrued expenses and other current liabilities. and $0.2 million in operating lease liabilities, current portion. 10 The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the three-month periods ended June 30, 2026 and 2025: For the Six-Month Ended June 30, (in US Dollar millions) 2026 2025 Net cash provided by provided by operating activities $ 5.5 $ 4.7 Net cash used in investing activities (0.0 ) (0.0 ) Net cash provided by financing activities 0.0 0.0 Effect of foreign currency exchange rate changes on cash and cash equivalents 3.6 2.0 Net increase in cash and cash equivalents 9.1 6.7 Cash and cash equivalents at the beginning of period 118.4 103.7 Cash and cash equivalents at the end of period $ 127.5 $ 110.5 Operating Activities Net cash provided by operating activities was $5.5 million for the six months ended June 30, 2026 as compared to net cash provided by operating activities of $4.7 million for the same period of the last year. The positive cash flow for the six months ended June 30, 2026 was primarily due to i) $6.0 million net income, adjusted by an increase of $1.0 million share-based compensation expenses and $0.3 million of amortization of operating right-of-use assets, ii) the increase of $0.9 million in income tax payable and $0.1 million due to a related party, and partially o ffset by iii) the increase of $2.6 million in accounts receivable and iv) the decrease of $0.2 million in accounts payable. The positive cash flow for the six months ended June 30, 2025 was primarily due to i) $4.8 million net income, ii) $0.3 million of amortization of operating right-of-use assets, iii) the decrease of $0.9 million in prepaid expenses and current assets, iii) the increase of in $0.2 million accounts payable, $0.5 million due to related parties, $0.9 million in tax payable and $0.4 million in accrued expenses and current liabilities, partially offset by iv) the increase of $3.1 million in accounts receivable and v) the decrease of $0.3 million in operating lease liabilities. Investing Activities There were no cash flows from investing activities for the six-month period ended June 30, 2026 and 2025. Financing Activities There were no cash flows from financing activities for the six-month period ended June 30, 2026, and 2025. As of June 30, 2026, our cash and cash equivalents were $127.5 million, as compared to $118.4 million at December 31, 2025. Days Sales Outstanding (“DSO”) has decreased to 47 days for the six months ended June 30, 2026 from 56 days for the year ended December 31, 2025. 11 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. Holding Company Structure There have been no changes to the Company’s holding company structure during the six months ended June 30, 2026. For more details, refer to the Company’s holding company structure disclosures set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Holding Company Structure” of the 2025 Form 10-K. Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries Please see “ITEM 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations- Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries” of the 2025 Form 10-K for more details. Capital Expenditure Commitment As of June 30, 2026, the Company had commitment of RMB7.3 million (equivalent to $1.08 million) for construction in progress. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as of June 30, 2026. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2025 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2025 Form 10-K. 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable for smaller reporting companies.