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Item 7. Management’s Discussion and Analysis

2023-04-17 compared with 2022-04-15 · 287 added, 255 removed, 351 unchanged (61% of the section changed)

Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion

and Analysis contains forward-looking statements relating to future events or our future financial performance.

In some cases, you can

identify forward-looking statements by terminology such as “may”, “should”, “intends”, “expects”,

“plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”,

or “continue” or the negative of these terms or other comparable terminology.

These statements are only predictions and involve

known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, levels of activity

or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking

Although we believe that the

expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance.

Management’s Discussion and Analysis contains forward-looking statements relating to future events or our future financial performance.

In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “intends”,

“expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”,

“potential”, or “continue” or the negative of these terms or other comparable terminology.

These statements are

only predictions and involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual

results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed

or implied by these forward-looking statements.

we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels

of activity or performance.

You should not place undue reliance on these statements, which speak only as of the date of this Annual Report.

These cautionary statements

should be considered with any written or oral forward-looking statements that we may issue in the future.

You should read this Annual

Report on Form 10-K with the understanding that our actual future results may be materially different from what we expect.

All forward-looking

statements speak only as of the date on which they are made.

We undertake no obligation to update such statements to reflect events that

occur or circumstances that exist after the date on which they are made, except as required by applicable law.

Management’s discussion

and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been

prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The following

discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction

with, the audited consolidated financial statements and related notes elsewhere in this Annual Report on Form 10-K.

were originally incorporated under the laws of the state of Nevada on August 31, 1992.

These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future.

You should read this Annual Report on Form 10-K with the understanding that our actual future results may be materially different from

what we expect.

All forward-looking statements speak only as of the date on which they are made.

We undertake no obligation to update

such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by

applicable law.

discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which

have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read

in conjunction with, the audited consolidated financial statements and related notes elsewhere in this Annual Report on Form 10-K.

were originally incorporated under the laws of the state of Nevada in August 1992.

On October 9, 2020, we entered into a share exchange

agreement (the “Share Exchange Agreement”) with Wetouch Holding Group Limited, a British Virgin Islands company incorporated

on August 14, 2020 under the laws of the British Virgin Islands (“BVI Wetouch”), and all the shareholders of BVI Wetouch

(each a “Shareholder” and collectively the “Shareholders”), to acquire all the issued and outstanding capital

stock of BVI Wetouch in exchange for the issuance to the Shareholders an aggregate of 28 million shares of our common stock (the “Reverse

agreement (the “Share Exchange Agreement”) with Wetouch Holding Group Limited, a British Virgin Islands (“BVI”)

company incorporated on August 14, 2020 under the laws of the British Virgin Islands (“BVI Wetouch”), and all the shareholders

of BVI Wetouch (each a “Shareholder” and collectively the “Shareholders”), to acquire all the issued and outstanding

capital stock of BVI Wetouch in exchange for the issuance to the Shareholders an aggregate of 28 million shares of our common stock (the

“Reverse Merger”).

The Reverse Merger closed on October 9, 2020.

Immediately after the closing of the Reverse Merger, we had a total of

31,396,394 issued and outstanding shares of common stock.

As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned subsidiary.

our wholly-owned subsidiaries, we are engaged in the research, development, manufacturing, sales and servicing of medium to large sized

projected capacitive touchscreens, which constitute our source of revenue.

We specialize in large-format touchscreens, which are

developed and designed for a wide variety of markets and used in the financial terminals, automotive, POS, gaming, lottery, medical,

HMI, and other specialized industries.

Our product portfolio comprises medium to large sized projected capacitive touchscreens ranging

from 7.0 inch to 42 inch screens.

In terms of the structures of touch panels, we offer (i) Glass-Glass (“GG”), primarily

used in GPS/car entertainment panels in mid-size and luxury cars, industrial HMI, financial and banking terminals, POS and lottery machines;

(ii) Glass-Film-Film (“GFF”), mostly used in high-end GPS and entertainment panels, industrial HMI, financial and banking

terminals, lottery and gaming industry;

(iii) Plastic-Glass (“PG”), typically adopted by touchscreens in GPS/entertainment

panels motor vehicle GPS, smart home, robots and charging stations;

and (iv) Glass-Film (“GF”), mostly used in industrial

The following discussion and analysis pertain to the financial condition and results of operations of our subsidiaries Hong Kong

Wetouch, Sichuan Wetouch, and Sichuan Vtouch for the years ended December 30, 2021 and 2020, respectively.

Effects of COVID-19

The COVID-19 pandemic and resulting

global disruptions have affected our businesses, as well as those of our customers and suppliers.

To serve our customers while also providing

for the safety of our employees and service providers, we have modified numerous aspects of our logistics, transportation, supply chain,

purchasing, and after-sale processes.

Beginning in Q1 2020, we made numerous process updates across our operations worldwide, and adapted

our fulfillment network, to implement employee and customer safety measures, such as enhanced cleaning and physical distancing, personal

protective gear, disinfectant spraying, and temperature checks.

We will continue to prioritize employee and customer safety and comply

with evolving state and local standards as well as to implement standards or processes that we determine to be in the best interests

of our employees, customers, and communities.

Due to the COVID-19 pandemic,

our subsidiary Sichuan Wetouch was temporarily shut down from early February 2020 to early March 2020 in accordance with the requirement

of the local governments.

Our business was negatively impacted and generated lower revenue and net income in 2020.

The Company has taken

proactive measures to promote products to new customers and entering more regions during the twelve-month period ended December 31, 2021.

The extent of the impact of COVID-19 on the Company’s results of operations and financial condition will depend on the virus’

future developments, including the duration and spread of the outbreak and the impact on the Company’s customers, which are still

uncertain and cannot be reasonably estimated at this point of time.

Immediately after the closing of the Reverse Merger, we

had a total of 31,396,394 issued and outstanding shares of common stock.

As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned

our wholly-owned subsidiaries, BVI Wetouch, HK Wetouch, Sichuan Vtouch and Sichuan Wetouch, we are engaged in the research, development,

manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens, which constitutes our source of revenues.

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.

In terms of the structures of touch panels, we

offer (i) Glass-Glass (“GG”), primarily used in GPS/car entertainment panels in mid-size and luxury cars, industrial HMI,

financial and banking terminals, POS and lottery machines;

(ii) Glass-Film-Film (“GFF”), mostly used in high-end GPS and

entertainment panels, industrial HMI, financial and banking terminals, lottery and gaming industry;

(iii) Plastic-Glass (“PG”),

typically adopted by touchscreens in GPS/entertainment panels motor vehicle GPS, smart home, robots and charging stations;

and (iv) Glass-Film

(“GF”), mostly used in industrial HMI.

The following discussion and analysis pertain financial condition and results of operations

of our subsidiaries Hong Kong Wetouch, Sichuan Wetouch and Sichuan Vtouch for the years ended December 30, 2022 and 2021, respectively.

COVID-19 pandemic and resulting global disruptions have affected our businesses, as well as those of our customers and suppliers significantly.

The spread of COVID-19 has caused significant disruption to society as a whole, including the workplace.

The resulting impact on the

global supply chain has disrupted most aspects of national and international commerce, with government-mandated social distancing measures

imposing stay-at-home and work-from-home orders in almost every country.

The effects of social distancing have shut down significant

parts of the local, regional, national, and international economies, for limited or extended periods of time, with the exception of government

designated essential services.

in the spring of 2021, China began to experience an increase of COVID-19 cases, and to some extent, local and national governments began

to take more restrictive measures to stem the spread of the virus, particularly from October to December 2021.

The Company has several

shutdowns during the year ended December 31, 2022.

serve our customers while also providing for the safety of our employees and service providers, we have modified numerous aspects of

our logistics, transportation, supply chain, purchasing, and after-sale processes.

The Company has taken proactive measures to promote

products to new customers and entering more regions during the year ended December 31, 2022.

The extent of the impact of COVID-19 on

the Company’s results of operations and financial condition will depend on the virus’ future developments, including the

duration and spread of the outbreak and the impact on the Company’s customers, which are still uncertain and cannot be reasonably

estimated at this point of time.

of Operations

for the year ended December 31, 2022 include:

Revenues were $40.8 million, an increase of 30.0% from $31.3 million for the year ended December 31, 2020

Gross profit was $18.4 million, an increase of 17.9% from $15.6 million for the year ended December 31, 2020

Net income was $17.4 million, an increase of 95.5% from $8.9 million for the year ended December 31, 2020

Total volume shipped was 1,922,353 units, an increase of 16.1% from 1,656,050 units for the year ended December 31, 2020

of Operations

Revenues were $37.9 million, a decrease of 7.1% from $40.8 million for the year ended December 31, 2021

Gross profit was $14.0 million, an decrease of 23.9% from $18.4 million for the year ended December 31, 2021

Gross profit margin was 37.0%, as compared to 45.3% for the year ended December 31, 2021

Net income was $8.7 million, a decrease of 50.0% from $17.4 million for the year ended December 31, 2021

Total volume shipped was 1,916,976 units, a decrease of 0.3% from 1,922,353 units for the year ended December 31, 2021

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

5 unchanged sentences

Operating income

Total other income (expenses)

Gain on asset disposal

Loss on conversion of notes payable

Gain (loss) on changes of fair values of Common Stock Purchase Warrant

Income before income taxes

1 unchanged sentence

the Years Ended December 31, 2022 and 2021

were $40.8 million in the year ended December 31, 2021, an increase of $9.4 million, or 30.0%, compared with $31.3 million in the year

ended December 31, 2020.

This increase was due to the increase of 16.1% in sales volume, an increase of 12.1% in the average selling

price of our products, and 6.6% positive impact from exchange rate due to appreciation of RMB against US dollars, as compared with those

were $37.9 million in the year ended December 31, 2022, a decrease of $2.9 million, or 7.1%, compared with $40.8 million in the same

period of last year.

This was mainly due to the decrease of 0.3% in sales volume, and a decrease of 2.7% in the average selling price

of our products in RMB, and 4.4% negative impact from exchange rate due to depreciation of RMB against US dollars, as compared with those

of the same period of last year.

the Years Ended December 31,

US Dollar except percentage)

from sales to customers in PRC

from sales to customers overseas

the Years Ended December 31,

UNIT, except percentage)

sold to customers in PRC

sold to customers overseas

For the Years Ended December 31,

(in US Dollar except percentage)

Revenue from sales to customers in PRC

Revenue from sales to customers overseas

Total Revenues

$ (2,862,361 )

For the Years Ended December 31,

(in UNIT, except percentage)

Units sold to customers in PRC

Units sold to customers overseas

Total Units Sold

Domestic market

the year ended December 31, 2021, revenue from our domestic market increased by $5.8 million or 27.0%, as a combined result of (i) an

increase of 12.0% in sales volume, (ii) an increase of 6.0% in the average selling price of our products, and (iii) 6.6% positive impact

from exchange rate due to appreciation of RMB against US dollars, as compared with those of last year.

for the RMB selling price, the increase of 6.0% was mainly due to the increased sales of new models of higher-end products with higher

selling prices, such as touch screens used in gaming machines and medical touchscreens in our domestic market during the year ended December

weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic in January 2020 weakened the touch screen business environment.

For the year ended December 31, 2020, the Company’s business was negatively impacted.

Due to our proactive efforts to market new

models such as POS touchscreens and market to new customers and into new regions, we had sales increases of 30.4% in Southwest China,

24.6% in East China, 22.4% in North china, and partially offset by decreases of 15.3% in South China, for the year ended December 31,

2021 as compared to the year ended December 31, 2020.

the year ended December 31, 2022, revenue from domestic market decreased by $0.8 million or 2.8%, as a combined result of (i) a decrease

of 2.6% in the average selling price of our products in RMB, and (ii) 4.4% negative impact from exchange rate due to depreciation of

RMB against US dollars, and offset by (iii) an increase of 4.1% in sales volume, as compared with those of last year.

for the RMB selling price, the decrease of 2.6% was mainly due to the marketing initiatives to enhance sales of new models of higher-end

products such as touch screens used in POS touchscreens, medical touchscreens and gaming touchscreens in marketing regions such as East

China during the year ended December 31, 2022.

weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic continued to exacerbate the touch screen business environment.

Since April 2022, the Chinese government has imposed strict zero tolerance virus policies and the Company’s business has been negatively

impacted and has continued to generate lower revenues during the year ended December 31, 2022.

Although the Company has taken proactive

efforts to market new models such as POS touchscreens and obtain new customers and penetrate into new regions with a sales increase of

0.8% in Eastern China, the Company had hard suffering of a decrease of 1.6% in Southwest China, and of 0.5% in Southern China due to

the government lockdown in this region during the year ended December 31, 2022.

Overseas market

the year ended December 31, 2021, revenue from our overseas market was $13.6 million as compared to $9.9 million for the year ended December

31, 2020, an increase of $3.7 million or 36.9%, mainly due to an increase of 24.5% in sales volume and an increase of 9.9% in the average

selling price of our products.

the year ended December 31, 2022, revenue from overseas market was $11.5 million as compared to and $13.6 million of the same period

of 2021, a decrease of $2.1 million or 15.4%, mainly due to a decrease of 8.3% in sales volume primarily due to 1) the slack overseas

2) negative effects of COVID 19 impact, such as more strict customs inspection in China leading to delayed product shipment during

the second half of 2022, and a decrease of 7.8% in average selling price of our products due to the decreased higher pricing medical

touchscreens during the year ended December 31, 2022, compared with those of the same period of last year.

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

the Years Ended December 31,

US Dollars, except percentage)

categories by end applications

Control Computer Touchscreens

Multi-Functional

Printer Touchscreens

For the Years Ended December 31,

(in US Dollars, except percentage)

Product categories by end applications

Automotive Touchscreens

$ (2,304,110 )

Industrial Control Computer Touchscreens

POS Touchscreens

Gaming Touchscreens

Medical Touchscreens

Multi-Functional Printer Touchscreens

Total Revenues

$ (2,862,362 )

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

Company continued to shift production mix from traditional lower-end products such as touchscreens used in the automotive and industrial

control computer industries to high-end products such as touchscreens used in self-service kiosks, medical touchscreens, ticket vending

machine and financial terminals, primarily due to (i) greater growth potential of computer screen models in China, and (ii) the stronger

demand and better quality demand from consumers’ recognition of higher-end touch screens made with better raw materials.

Company continued to shift production mix from traditional lower-end products such as touchscreens used in automotive to high-end products

such as touchscreens used in POS touchscreens and multi-functional printer touchscreens, primarily due to (i) greater growth potential

of computer screen models in China, and (ii) the stronger demand and better quality demand from consumers’ recognition of higher-end

touchscreens made with better raw materials.

Profit and Gross Profit Margin

1 unchanged sentence

Gross Profit Margin

profit was $18.4 million during the year ended December 31, 2021, as compared to $15.6 million in the year ended December 31, 2020, representing

an increase of $2.8 million, or 17.9%, primarily due to the increase in sales of $9.5 million, partially offset by the increase of cost

of materials by 33.5% and overhead by 62.3% for the year ended December 31, 2021.

As a result, our gross margin was 45.3% during the

year ended December 31, 2021 as compared to 49.8% for the year ended December 31, 2020.

and Administrative Expenses

millions, except percentage)

profit was $14.0 million during the year ended December 31, 2022, as compared to $18.4 million in the same period of 2021, representing

a decrease of $4.4 million, or 23.9%.

Our gross margin was 37.0% during the year ended December 31, 2022, as compared to 45.3% for the

year ended December 2021, primarily due to the decrease of sales by 7.1%, and the increase of 13.2% in cost of materials such as the

chip cost, partially offset by the decrease of labor cost by 2.2%, depreciation and other overhead cost such as rent and electricity

by 9.0% due to the reduced production volume for the year ended December 31, 2022.

(in millions, except percentage)

Selling Expenses

as a percentage of revenues

expenses were $1.3 million during the year ended December 31, 2022, as compared to $0.6 million for the year ended December 31, 2021,

primarily due to the increase of marketing expenses of $0.7 million as the Company took promotional efforts to market new models such

as POS touchscreens and obtain new customers and penetrate into new regions in order to reduce the negative impact of COVID 19.

and Administrative Expenses

a percentage of revenues

and administrative (G&A) expenses were $1.9 million for the year ended December 31, 2021, as compared to $2.3 million for the year

ended December 31, 2020, representing a decrease of $0.4 million, or 17.4%, primarily due to $0.8 million in professional fees and $0.2

million in miscellaneous fees, partially offset by (i) the increase of $0.3 million loss of VAT input credits due to Sichuan Wetouch

ceasing operation and relocation to comply with local PRC government guidelines on local environmental issues and the national overall

plan (see Note 5 of our Consolidated Financial Statements) and (ii) the increase of $0.1 million in accelerated amortization expense

due to Sichuan Wetouch ceasing operation and relocation to comply with local PRC government guidelines on local environmental issues

and the national overall plan (see Note 5 of our Consolidated Financial Statements ).

and Development Expenses

millions, except percentage)

(in millions, except percentage)

General and Administrative Expenses

as a percentage of revenues

and administrative (G&A) expenses was $1.3 million for the year ended December 31, 2022, as compared to $1.9 million for the year

ended December 31, 2022, representing a decrease of 31.6%, or $0.6 million.

The decrease was primarily due to i) $0.4 million loss of

VAT input credits due to Sichuan Wetouch ceasing operation and relocation to comply with local PRC government guidelines on local environmental

issues and the national overall plan, ii) $0.1 million accelerated amortization expense due to Sichuan Wetouch ceasing operation and

relocation to comply with local PRC government guidelines on local environmental issues and the national overall plan during the year

ended December 31, 2021 (See Note 5), iii) the decrease of $0.4 million miscellaneous fees, and partially offset by iv) an increase of

$0.3 million professional fees during the year ended December 31, 2022.

and Development Expenses

a percentage of revenues

and development (R&D) expenses were $89,477 in the year ended December 31, 2021 compared to $77,997 in the year ended December 31,

2020, representing an increase of $11,480, or 0.0%.

The increase was primarily due to the increase of salary and welfare expenses of

R&D personnel.

millions, except percentage)

a percentage of revenues

compensation were $3.1 million for the year ended December 31, 2021 compared to $1.1 million for the year ended December 31, 2020, representing

an increase of $2.0 million or 181.8%.

(in US dollars, except percentage)

Research and Development Expenses

as a percentage of revenues

and development (R&D) expenses were $85,251 in the year ended December 31, 2022 compared to $89,477 in the same period in 2021, representing

a decrease of $4,226, or 0.0, mainly due to the decrease of salary and welfare expenses of R&D personnel.

(in millions, except percentage)

Share-based compensation

as a percentage of revenues

compensation were nil and $3.1 million for the years ended December 31, 2022 and 2021, respectively.

January 1, 2021, the Board of Directors of the Company authorized the issuance of an aggregate of 310,830 shares and 631,080 warrants

1 unchanged sentence

The Company recognized relevant share-based compensation expense of $1,041,281

for the vested shares and $2,107,825 for the warrants.

December 22, 2020, the Board of Directors of the Company

authorized the issuance of an aggregate of 103,610 shares and 210,360 warrants to The Crone Law Group P.C.

or its designees for legal

services that had been rendered.

The Company recorded relevant share-based compensation

expense of $351,238 for the vested shares and $713,120 for the warrants, respectively.

for the vested shares and $2,107,825 for the warrants during the year ended December 31, 2021.

operating income was $11.4 million for the year ended December 31, 2022 compared to $12.6 million for the year ended December 31, 2021,

representing an increase of $0.7 million or 5.9%.

This increase is primarily due to the higher gross profit, partially offset by higher

operating expenses described above.

on changes in fair value of Common Stock

Purchase Warrants

millions, except percentage)

on changes in fair value of Common Stock Purchase

a percentage of revenues

on changes in fair value of common stock purchase

warrants was $0.8 million for the year ended December 31, 2021 as compared to nil in 2020 (See Note 11(b)).

on Asset Disposal

millions, except percentage)

representing a decrease of $1.2 million or 9.5% due to lower gross profit and higher selling expenses, partially offset by the lower

G&A expenses and share-based compensation expenses.

on Asset Disposal

a percentage of revenues

on asset disposal was $7.6 million for the year ended December 31, 2021 compared to nil for the year ended December 31, 2020.

to local PRC government guidelines on local environmental issues and the national overall plan, Sichuan Wetouch was under government

(in millions, except percentage)

Gain on asset disposal

as a percentage of revenues

on asset disposal was nil for the year ended December 31, 2022 compared to $7.6 million for the year ended December 31, 2021.

to local PRC government guidelines on local environmental issues and the national overall plan, Sichuan Wetouch was under the government

directed relocation order to relocate no later than December 31, 2021 and received compensation accordingly.

5 unchanged sentences

the Company recorded a gain of $7,625,279 for the asset disposal.

millions, except percentage)

before Income Taxes

Tax Benefit (Expense)

income tax rate

on conversion of notes payable

(in millions, except percentage)

Loss on conversion of notes payable

as a percentage of revenues

on conversion of notes payable were $0.1 million for the year ended December 31, 2022, as lenders of convertible promissory note payable

converted certain principal, accrued and unpaid interest and default charges totaling $1,038,426 into 1,384,564 shares of common stock

of the Company, including two notes fully converted.

As a result, the Company recorded a loss on the conversion of notes payable of $0.1

million accordingly (see Note (9 (a)).

on changes in fair value of Common Stock Purchase Warrants

(in millions, except percentage)

Gain on changes in fair value of Common Stock Purchase Warrants

as a percentage of revenues

on changes in fair value of common stock purchase warrants was $0.9 million and $0.8 million for the years ended December 31, 2022 and

2021, respectively (See Note 9 (b)).

(in millions, except percentage)

Income before Income Taxes

Income Tax Benefit (Expense)

Effective income tax rate

effective income tax rates for the years ended December 31, 2022 and 2021 were 27.1% and 20.2%, respectively.

The effective

income tax rate increased from 14.8% for the year ended December 31, 2020 to 20.2% for the year ended December 31, 2021, primarily

due to i) the increased income before income taxes for the year ended December 31, 2021 as compared to the prior year;

ii) the operations

of Sichuan Wetouch, which enjoyed preferential income tax rates, was taken over by Sichuan Vtouch during the first quarter of 2021

(see Note 1).

The effective income tax rate for the year ended December 31, 2021 differs from the PRC statutory income tax rate of 25%

primarily due to Sichuan Wetouch’s preferential income tax rate.

PRC subsidiaries had $46.2 million of cash and cash equivalents at December 31, 2021, which amount is planned to be indefinitely reinvested

within the PRC.

The distributions from our PRC subsidiary are subject to U.S.

federal income tax at 21%, less any applicable foreign

Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income

tax liabilities related to PRC withholding income tax on undistributed earnings of our PRC subsidiaries.

a result of the above factors, we had a net income of $17.4 million for the year ended December 31, 2021 compared to net income

of $8.9 million for the year ended December 31, 2020.

The effective income tax

rate increased during the year ended December 31, 2022 primarily due to Sichuan Wetouch’s preferential income tax rate for the

same period of 2021.

PRC subsidiaries had $51.2 million of cash and cash equivalents at December 31, 2022, which are planned to be indefinitely reinvested

The distributions from our PRC subsidiary are subject to the U.S.

federal income tax at 21%, less any applicable foreign tax

Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax

liabilities related to PRC withholding income tax on undistributed earnings of our PRC subsidiaries.

a result of the above factors, we had a net income of $8.7 million the year ended December 31, 2022 compared to net income of $17.4 million

for the year ended December 31, 2021.

AND CAPITAL RESOURCES

11 unchanged sentences

Financing may not be available in amounts or on terms acceptable to us, or at all.

of December 31, 2022, we had current assets of $62.2 million, consisting of $51.3 million in cash, $9.1 million in accounts receivable,

$0.4 million in inventories, and $1.5 million in prepaid expenses other current assets.

Our current liabilities as of December 31, 2022,

were $4.0 million, which is comprised of $1.4 million in accounts payable, $0.9 million in accrued expenses and other current liabilities,

$0.4 million loan from a third party, and $1.3 million convertible promissory notes payable.

following table sets forth a summary of our cash flows for the periods indicated.

7 unchanged sentences

Cash and cash equivalents at the end of period

cash provided by operating activities was $14.0 million for the year ended December 31, 2021, as compared to $13.0 million provided

by operating activities for the year ended December 31, 2020, primarily due to (i) the increase of $8.4 million in net income

for the year ended December 31, 2021 as compared to the year ended December 31, 2020, (ii) the increase of $2.1 million of share-based

compensation, (iii) the decrease of $1.6 million in accrued expenses and other current liabilities;

(iv) the increase of $0.8

million in gain on changes in fair value of common stock purchase warrants, partially offset by (v) the decrease of $7.6 million

gain on asset disposal for the year ended December 31, 2021, (vi) the decrease of $2.3 million in prepaid expenses including

$1.0 million in prepaid marketing expenses;

(vii) the decrease of $0.5 million income tax payable due to income tax clearance

for Sichuan Wetouch during the year ended December 31, 2021;

and (viii) the increase of 0.5 million of deferred income due to Sichuan

Wetouch’s write-off of the government grant in the ceasing of operations process for the year ended December 31, 2021 as compared

to the year ended December 31, 2020.

cash provided by investing activities was $6.2 million for the year ended December 31, 2021, primarily due to i) $17.8 million in proceeds

from asset disposal for Sichuan Wetouch, partially offset by ii) $11.7 million in purchase of property, plant, and equipment for the

year ended December 31, 2021.

were no investing activities for the year ended December 31, 2020.

cash provided by financing activities was $1.8 million for the year ended December 31, 2021 as a result of proceeds of $2.0 million

from the issuance of seven (7) convertible promissory notes, partially offset by the payment

of issue cost of $0.2 million related to the notes financing (see Note 11).

cash used in financing activities was $4.7 million for the year ended December 31, 2020, primarily consisting of (i) the repayment of

advances from related parties of $4.3 million, and (ii) repayments of bank borrowings of $0.4 million for the year ended December 31,

December 31, 2021, our cash and cash equivalents were $46.2 million, as compared to $24.0 million at December 31, 2020.

Sales Outstanding (“DSO”) decreased from 161 days for the year ended December 31, 2020 to 88 days for the year ended December

31, 2021, as a result of Sichuan Wetouch settling all accounts receivable collection from customers.

cash provided by operating activities was $8.6 million for the year ended December 31, 2022, as compared to $14.0 million provided by

operating activities for for the year ended December 31, 2021, primarily due to (i) the decrease of $8.7 million net income for the year

ended December 31, 2022 as compared to the same period of 2021, (ii) the decrease of $3.1 million of share-based compensation during

the year ended December 31, 2022 , (iii) ) the increase of $6.5 million account receivable due to slower collection from the impact of

the COVID-19 pandemic and Sichuan Wetouch settling customer receivables during the year ended December 31, 2021;

partially offset by

(iv) the increase of $0.8 million of account payable due to the longer payment period (v) $7.6 million gain on asset disposal for the

year ended December 31, 2021, (vi) the decrease of $3.1 million prepaid expenses including amortization of $1.0 million prepaid marketing

expenses during the year ended December 31, 2022;

(vii) 0.5 million of deferred income due to Sichuan Wetouch write-off government grant

in the operating ceasing process for the year ended December 31, 2021.

was nil investing activities for the year ended December 31, 2022.

were $17.8 million in proceeds from asset disposal for Sichuan Wetouch, and $0.2 million in purchase of property, plant and equipment

for year ended December 31, 2021.

See Note 5 in the interim financial information.

cash used in the financing activities was $0.7 million for the year ended December 31, 2022, including $1.4 million of repayment of convertible

promissory note payable (see Note 9 (a)), partially offset by 0.4 million loan from a third party.

cash provided by the financing activities was $1.8 million for the year ended December 31, 2021 as a result of proceeds of $2.0 million

from issuance of seven convertible promissory notes, partially offset by the payment of issue cost of $0.2 million related to notes financing

(see Note 11).

of December 31, 2022, our cash and cash equivalents were $51.3 million, as compared to $46.2 million at December 31, 2021.

Sales Outstanding (“DSO”) has decreased at 81 days for the year ended December 31, 2022 compared to 88 days for the year

ended December 31, 2021.

following table provides an analysis of the aging of accounts receivable as of December 31, 2022 and December 31, 2021:

December 31, 2022

December 31 2021

-1-3 months past due

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7-12 months past due

than 1 year past due

accounts receivable

-greater than 1 year past due

Total accounts receivable

majority of the Company’s revenues and expenses were denominated primarily in Renminbi (“RMB”), the currency of the

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has not had a material impact on the Company’s business.

industry’s typical payment term is 180 days.

Accounts receivable are written off against the allowances only after exhaustive collection

Although the Company did not extend payment terms to its customers during the year ended December 31, 2020, collection activities

were stalled during February and March 2020, during which most businesses were not in operation, except essential services.

industry typical payment term is 180 days.

Accounts receivables are written off against the allowances only after exhaustive collection

on past performance and current expectations, we believe our cash and cash equivalents provided by operating activities and financing

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AND CONTINGENCIES

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.

of December 31, 2022, the Company had several legal claims or litigations.

As of the date of this Annual Report, all actions have been settled

and Sichuan Wetouch, Hong Kong Wetouch and Mr.

Guangde Cai were unconditionally and fully discharged and released therefrom.

For a discussion of the Company’s

legal proceedings, see Note 13 to the Financial Statements in Item 8 .

expenditure commitment

December 20, 2021, the Company entered into a contract with Shenzhen Municipal Haoyutuo Decoration & Cleaning Engineering Company

Limited to purchase a facility decoration contract of RMB20.0 million (equivalent to US$3.1 million).

As of December 31, 2022, the Company

has prepaid RMB15.0 million (equivalent to US$2.2 million) and recorded as construction in progress (see Note 5) and had a remaining

balance of RMB5.0 million (equivalent to US$0.7 million) to be paid by the end of 2023.

Sheet Arrangements

Company and Mr.

Guangde Cai had provided guarantees for seven different loans for parties related to the Company and Mr.

As of October

9, 2020, the Company and Mr.

Guangde Cai have been unconditionally and fully released from all such guarantees.

See “ Certain

Relationships and Related Transactions, and Director Independence ”.

were no off-balance sheet arrangements as of December 31, 2022.

Accounting Policies

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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 annual report.

When reviewing our financial statements, you

should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application

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.

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Inventories are carried at this lower cost basis until sold or scrapped.

Nil and US$66,944 inventory write-off was recorded for the years ended December 31, 2021 and 2020, respectively.

$74,100 and nil inventory write-off was recorded for the years ended December 31, 2022 and 2021, respectively.

Promissory Notes

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of a derivative instrument listed in ASC 815-10-15-83:

(i) having one or more underlying and one or more notional amounts or payment

(i) having one or more underlyings and one or more notional amounts or payment

provisions or both;

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and (iii) permitting net settlement.

the Company’s notes have fixed interest rate, specified notional principal and settlement date, which no other events would affect specified

settlement, and the Company received net proceeds after issuance costs and discount, which the Company recorded as net proceeds or net

settled investment, the management assessed that the Notes do not meet the definition of a derivative instruments and an embedded feature

would not be bifurcated.

The discounts on the convertible notes, are amortized to interest expense, using the effective interest method,

over the terms of the related convertible notes.

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.

stock purchase warrants

Company also analyzed the Warrants issued in the November and December 2021 financing in accordance with ASC 815, to determine whether

the Warrants meet the definition of a derivative and, if so, whether the Warrants meet the scope exception of ASC 815-40, which is that

contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’

equity shall not be considered to be derivative instruments for purposes of ASC 815-40.

Company concluded that the Warrants issued in the November and December 2021 financing should be treated as a derivative liability because

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.

Company concluded that the Warrants issued in November and December 2021 financing should be treated as a derivative liability because

the Warrants are entitled to a price adjustment provision to allow the exercise price to be increased or reduced in the event the Company

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Company used a black-scholes-pricing model to estimate the fair values of common stock purchase warrants at the balance sheet dates.

As of December 31, 2021, the Company recorded $1,128,635 common stock purchase warrants liability and $759,471 gain on change of fair

value of common stock purchase liability warrants for the year ended December 31, 2021.

As of December 31, 2022 and 2021, the Company recorded $256,957 and $1,128,635 common stock purchase warrants liability, respectively,

and $871,677 and $759,471 gain on change of fair value of common stock purchase liability warrants for the year ended December 31, 2022

and 2021, respectively.

Company accounts for current income taxes in accordance with the laws of the relevant tax authorities.

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plant and equipment, net

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:

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:

Machinery and equipment

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statements of income and other comprehensive income in other income or expenses.

Company’s intangible assets primarily includes land use rights and patent right.

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.

The cost of a land use right is usually

paid in one lump sum at the date the right is granted.

The prepayment usually covers the entire period of the land use right.

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, which is normally 50 years.

are recognized at cost of acquisition.

They have a finite life and are carried at cost less any accumulated amortization and any impairment

of long-lived Assets

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effective for public entities which meet the definition of a smaller reporting company are effective for fiscal years, and interim periods

within those fiscal years, beginning after December 15, 2023, including

interim periods within those fiscal years.

Early application of the guidance will be permitted for all entities for fiscal years beginning

after December 15, 2020, including interim periods within those fiscal years .

The Company adopted

ASU 2020-06 effective January 1, 2021.

within those fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years.

Early application

of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2020, including interim periods within

those fiscal years.

The Company adopted ASU 2020-06 effective January 1, 2021.

June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the

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effective for interim and annual reporting periods beginning within 2021 with early adoption permitted.

October 2021, the FASB issued ASU No.

2021-08, which will require companies to apply the definition of a performance obligation under

ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers

that are acquired in a business combination.

Under current U.S.

GAAP, an acquirer generally recognizes assets acquired and liabilities

assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers,

at fair value on the acquisition date.

2021-08 will result in the acquirer recording acquired contract assets and liabilities

on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606.

2021-08 is effective

for fiscal years beginning after December 15, 2022, with early adoption permitted.

The Company is currently evaluating the impact of

this ASU on its financial statements and the effects will be based upon the contract assets and liabilities acquired in the future.

time to time, the FASB or other standards setting bodies issue new accounting pronouncements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis