Notes
to Condensed Consolidated Financial Statements (Unaudited)
NOTE
1 — BUSINESS DESCRIPTION
Business
Wetouch
Technology Inc. (“Wetouch”, or the “Company”), formerly known as Gulf West Investment Properties, Inc., was originally
incorporated in August 1992, under the laws of the state of Nevada.
On
October 9, 2020, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Wetouch Holding
Group Limited (“BVI Wetouch”) and all the shareholders of BVI Wetouch (each, a “BVI Shareholder” and collectively
the “BVI Shareholders”), to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange for the issuance
to the BVI Shareholders an aggregate of 28,000,000 shares of our common stock (the “Reverse Merger”). In the Reverse Merger,
each ordinary share of BVI Wetouch was exchanged for 2,800 shares of common stock of Wetouch. Immediately after the closing of the Reverse
Merger on October 9, 2020, we had a total of 31,396,394 issued and outstanding shares of common stock. As a result of the Reverse Merger,
BVI Wetouch is now our wholly-owned subsidiary.
Wetouch
Holding Group Limited (“BVI Wetouch”), is a holding company whose only asset, held through a subsidiary, is 100% of the registered
capital of Sichuan Wetouch Technology Co. Ltd. (“Sichuan Wetouch”), a limited liability company organized under the laws
of the People’s Republic of China (“China” or “PRC”). Sichuan Wetouch is primarily engaged in the business
of research development, manufacture, and distribution of touchscreen displays to customers both in PRC and overseas. The touchscreen
products, which are manufactured by the Company, are primarily for use in computer components.
The
Reverse Merger was accounted for as a recapitalization effected by a share exchange, wherein BVI Wetouch is considered the acquirer for
accounting and financial reporting purposes. The assets and liabilities of BVI Wetouch have been brought forward at their book value
and no goodwill has been recognized. The number of shares, par value amount, and additional paid-in capital in the prior years are retrospectively
adjusted according.
Corporate
History of BVI Wetouch
Wetouch
Holding Group Limited (“BVI Wetouch”) was incorporated under the laws of British Virgin Islands on August 14, 2020. It became
the holding company of Hong Kong Wetouch Electronics Technology Limited (“Hong Kong Wetouch”) on September 11, 2020.
Hong
Kong Wetouch Technology Limited (“HK Wetouch”), was incorporated as a holding company under the laws of Hong Kong Special
Administrative Region (“SAR”) on December 3, 2020. On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Vtouch.
Due to the fact that Hong Kong Wetouch and HK Wetouch are both under the same sole stockholder, the acquisition is accounted for under
common control.
In
June, 2021, Hong Kong Wetouch completed its dissolution process pursuant to the minutes of its special shareholder meeting.
Sichuan
Wetouch Technology Co. Ltd. (“Sichuan Wetouch”) was formed on May 6, 2011 in the People’s Republic of China (“PRC”)
and became Wholly Foreign-Owned Enterprise in PRC on February 23, 2017. On July 19, 2016, Sichuan Wetouch was 100% held by HK Wetouch.
On
December 30, 2020, Sichuan Vtouch Technology Co., Ltd. (“Sichuan Vtouch”) was incorporated in Chengdu, Sichuan, under the
laws of the People’s Republic of China.
In
March 2021, pursuant to local PRC government guidelines on local environmental issues and the national overall plan, Sichuan Wetouch
was under the government directed relocation order, and started its dissolution process which is estimated to be completed by the end
of 2022. Sichuan Vtouch took over the operating business of Sichuan Wetouch.
As
a result of the above restructuring, HK Wetouch became the sole shareholder of Sichuan Vtouch.
Note
2 — BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the
United States Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of December 31, 2021
was derived from the audited consolidated financial statements of Wetouch. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2021, and the related
consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended.
In
the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of
the financial position as of September 30, 2022, the results of operations and cash flows for the three-month and nine-month periods
ended September 30, 2022 and 2021 have been made. However, the results of operations included in such financial statements may not necessary
be indicative of annual results.
Use
of Estimates
The
preparation of condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and
liabilities. Actual results could differ from those estimates.
On
an ongoing basis, management evaluates the Company’s estimates, including those related to the bad debt allowance, fair values
of financial instruments, intangible assets and property and equipment, income taxes, and contingent liabilities, among others. The Company
bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form
the basis for making judgments about the carrying values of assets and liabilities.
Significant
Accounting Policies
For
a detailed discussion about Wetouch’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting
Policies,” in Wetouch’s consolidated financial statements included in Company’s 2021 audited consolidated financial
statements. During the three-month and nine-month periods ended September 30, 2022, there were no significant changes made to Wetouch
significant accounting policies.
NOTE-3-
ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
SCHEDULE
OF ACCOUNTS RECEIVABLE
| |
September
30,
2022 | | |
December
31 2021 | |
Accounts
receivable | |
$ | 14,281,922 | | |
$ | 7,991,037 | |
Allowance
for doubtful accounts | |
| - | | |
| - | |
Accounts
receivable, net | |
$ | 14,281,922 | | |
$ | 7,991,037 | |
The
Company’s accounts receivable primarily includes balance due from customers when the Company’s products are sold and delivered
to customers.
NOTE-4
— PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consists of the following:
SCHEDULE
OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
September
30,
2022 | | |
December
31,
2021 | |
Advance
to suppliers | |
$ | 297,260 | | |
$ | 244,758 | |
VAT
input credits | |
| - | | |
| 307,575 | |
Issue
cost related to convertible promissory notes | |
| 138,687 | | |
| 159,000 | |
Deferred
marketing expenses | |
| - | | |
| 1,000,000 | |
Prepayment
for land use right/ (i) | (i) |
| 551,800 | | |
| 615,955 | |
Security
deposit (ii) | (ii) |
| 55,247 | | |
| 61,670 | |
Others
receivable (iii) | (iii) |
| 130,255 | | |
| 56,936 | |
Prepaid
expenses and other current assets | |
$ | 1,173,249 | | |
$ | 2,445,894 | |
(i) |
|
On July 23, 2021, Sichuan
Vtouch entered into a contract with Chengdu Wenjiang District Planning and Natural Resources Bureau for purchasing a land use right
of 131,010 square feet with a consideration of RMB3,925,233 (equivalent to $551,800) for the new facility. The Company made a full
prepayment by November 18, 2021. Upon a certificate of land use right issued by the local government, which is estimated to be obtained
by the fourth quarter of 2022, the Company will reclassify this prepayment to intangible assets accordingly. |
(ii) |
|
On July 28, 2021, Sichuan
Vtouch made a security deposit of RMB393,000 (equivalent to $55,247) to Chengdu Cross-Strait Science and Technology Industry Development
Park Management Committee to obtain a construction license for new facility. This deposit will be refunded upon the issuance of the
construction license by end of 2022. |
(iii) |
|
Other receivables are mainly
employee advances, and prepaid expenses. |
NOTE
5— PROPERTY, PLANT AND EQUIPMENT, NET
SCHEDULE
OF PROPERTY, PLANT AND EQUIPMENT
| |
September
30,
2022 | | |
December
31,
2021 | |
Buildings | |
$ | 12,107 | | |
$ | 13,514 | |
Vehicles | |
| 41,162 | | |
| 45,948 | |
Construction
in progress | |
| 10,552,131 | | |
| 11,778,957 | |
Subtotal | |
| 10,605,400 | | |
| 11,838,419 | |
Less:
accumulated depreciation | |
| (11,604 | ) | |
| (5,117 | )) |
Property,
plant and equipment, net | |
$ | 10,593,796 | | |
$ | 11,833,302 | |
Depreciation
expense was $2,340 and $2,477 for the three-month period ended September 30, 2022 and 2021, respectively, and $12,494 and $263,873 for
the nine-month period ended September 30, 2022 and 2021, respectively
Pursuant
to local PRC government guidelines on local environment issues and the national overall plan, Sichuan Wetouch is under the government
directed relocation order to relocate no later than December 31, 2021 and received compensation accordingly. On March 18, 2021, pursuant
to the agreement with the local government and an appraisal report issued by a mutual agreed appraiser, Sichuan Wetouch received a compensation
of RMB115.2 million ($16.2 million) (“Compensation Funds”) for the withdrawal of the right to use of state-owned land and
the demolition of all buildings, facilities, equipment and all other appurtenances on the land. During the year ended December 31, 2021,
the Company recorded a gain of $7,611,646 for the asset disposal.
On
March 16, 2021, in order to minimize interruption of our business, Sichuan Vtouch entered into a leasing agreement with Sichuan Renshou
Shigao Tianfu Investment Co., Ltd., a limited company owned by the local government, to lease the property, and all buildings, facilities
and equipment thereon (“Demised Properties) of Sichuan Wetouch, commencing from April 1, 2021 until December 31, 2021 at a monthly
rent of RMB300,000 ($42,173) , and renewed on December 31, 2022 at a monthly rent of RMB 400,000 ($56,231) from January 1, 2022 till
October 31, 2022 for the use of the Demised Properties .
NOTE
6 – RELATED PARTY TRANSACTIONS
The
related party transactions are summarized as follows:
SCHEDULE
OF REVENUES FROM RELATED PARTY TRANSACTIONS
| |
2022 | | |
2021 | | |
2022 | |
|
2021 | |
| |
Three-Month
Period Ended September
30, | | |
Nine-Month
Period Ended September
30, | |
| |
2022 | | |
2021 | | |
2022 | |
|
2021 | |
| |
US$ | | |
US$ | | |
US$ | |
|
US$ | |
Revenues
resulting from related parties: | |
| | | |
| | | |
| | |
|
| | |
Sales
to Chengdu Wetouch Technology Co., Ltd (“Chengdu Wetouch”) | |
$ | - | | |
$ | - | | |
$ | - | |
|
$ | 10,451 | |
Sales
to Meishan Vtouch Electronics Technology Co., Ltd. (Meishan Wetouch) | |
| - | | |
| - | | |
| - | |
|
| 87,103 | |
Total
Revenue | |
$ | - | | |
$ | - | | |
$ | - | |
|
$ | 97,554 | |
During
the six-month period ended June 30, 2021, the Company sold capacitive touchscreens to Chengdu Wetouch and Meishan Wetouch from time to
time. There were no written agreements between the Company and Meishan Wetouch. Mr. Guangde Cai, Chairman and director of the Company
and our indirect majority shareholder, owns 94% and 95% of Chengdu Wetouch and Meishan Wetouch, respectively.
Amounts
due to related parties are as follows:
SCHEDULE
OF RELATED PARTY TRANSACTIONS
| |
Relationship | |
September
30, 2022 | | |
December
31, 2021 | | |
Note |
Mr. Zongyi Lian | |
President and CEO of the Company | |
$ | 1,614 | | |
$ | 1,802 | | |
Payable to employee |
Mr. Guangde Cai | |
Chairman of the Company | |
| 104,276 | | |
| 32,867 | | |
Payable to employee |
Total | |
| |
$ | 105,890 | | |
$ | 34,669 | | |
|
NOTE
7 — INCOME TAXES
Wetouch
Wetouch
Technology Inc. is subject to a tax rate of 21% per beginning 2018, and files a U.S. federal income tax return.
BVI
Wetouch
Under
the current laws of the British Virgin Islands, BVI Wetouch, subsidiaries of Wetouch, is not subject to tax on its income or capital
gains. In addition, no British Virgin Islands withholding tax will be imposed upon the payment of dividends by the Company to its shareholders.
Hong
Kong
HK
Wetouch is incorporated in Hong Kong and is subject to profit taxes in Hong Kong at a progressive rate of 16.5%.
PRC
Sichuan
Wetouch and Sichuan Vtouch files income tax returns in the PRC. Effective from January 1, 2008, the PRC statutory income tax rate is
25% according to the Corporate Income Tax (“CIT”) Law which was passed by the National People’s Congress on March 16,
2007.
Under
PRC CIT Law, domestic enterprises and Foreign Investment Enterprises (“FIEs”) are usually subject to a unified 25% enterprise
income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on a case-by-case basis by local government
as preferential tax treatment to High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs
are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for their HNTE status every three years. Pursuant
to an approval from the local tax authority in October 2017, Sichuan Wetouch became a qualified enterprise located in the western region
of the PRC, entitled it to a preferential income tax rate of 15% from October 11, 2017 to October 11, 2020.
On
October 21, 2020, Sichuan Wetouch was granted on a case-by-case basis by Sichuan Provincial government as preferential tax treatment
High and New Technology Enterprises (“HNTEs”), entitled to a reduced income tax rate of 15% beginning October 21, 2020 until
October 20, 2023.
Sichuan
Vtouch is entitled to 25% of income tax rate.
The
effective income tax rates for the nine-month periods ended September 30, 2022 and 2021 were 27.9% and 20.6%, respectively. The effective
income tax rate for the nine-month period ended September 30, 2022 and 2021 differs from the PRC statutory income tax rate of 25% primarily
due to non deductible expenses of $35,542 resulting from gain of changes in fair value of Common Stock Purchase Warrants for the nine-month
periods ended September 30, 2022, and Sichuan Wetouch’s preferential income tax rate for the same period of the last year, respectively.
The
estimated effective income tax rate for the year ended December 31, 2022 would be similar to actual effective tax rate of the nine-month
periods ended September 30, 2022.
NOTE
8— ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following:
SCHEDULE
OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| |
September
30,
2022 | | |
December
31,
2021 | |
Advance
from customers | |
$ | 199,491 | | |
$ | 59,111 | |
Accrued
payroll and employee benefits | |
| 86,686 | | |
| 99,342 | |
Accrued
interest expenses | |
| 153,275 | | |
| 20,795 | |
Other
tax payables (i) | (i) |
| 253 | | |
| - | |
Others
(ii) | (ii) |
| 344,208 | | |
| 131,159 | |
Accrued
expenses and other current liabilities | |
$ | 783,913 | | |
$ | 310,407 | |
(i) |
Other tax payables are mainly
value added tax payable. |
(ii) |
Others mainly represent accrued
employee reimbursement payable and other accrued miscellaneous operating expenses. |
NOTE
9 – CONVERTIBLE PROMISSORY NOTES PAYABLE
a)
Convertible promissory notes
In
October, November, and December 2021, the Company, issued seven (7) convertible promissory notes of US$2,250,000 aggregate principal
amount, due in one year (the ‘Notes’) with issuance price discounted 90.0%. The Notes bear interest at a rate of 8.0% per
annum, payable in one year and will mature on October 27, November 5, November 16, November 29 and December 2 of 2022. Net proceeds after
debt issuance costs and debt discount were approximately US$1,793,000. Debt issuance costs in the amount of US$162,000 are recorded as
deferred charges and included in the other current assets on the consolidated balance sheet. The debt discount and debt issuance costs
are amortized into interest expense using the effective interest method over the terms of the Notes.
The
details of convertible notes are as follows:
Unless
the Notes are converted, the principal amounts of the Notes, and accrued interest at the rate of 8% per annum, are payable on the one-year
anniversary of the issuance of the Notes (the “Maturity Date”). If the Company fails to satisfy its loan obligation by the
Maturity Date, the default interest rate will be 16%.
The
Lenders have the right to convert any or all of the principal and accrued interest on the Notes into shares of common stock of the Company
on the earlier of (i) 180 calendar days after the issuance date of the Notes or (ii) the closing of a listing for trading of the common
stock of the Company on a national securities exchange offering resulting in gross proceeds to the Company of $15,000,000 or more (an
“Uplist Offering”). If the Company closes an Uplist Offering on or before the 180th calendar date after
the issuance date of the Notes, the conversion price shall be 70% of the per share offering price in the Uplist Offering; otherwise,
the conversion price is $0.75 per share.
Subject
to customary exceptions, if the Company issues shares or any securities convertible into shares of common stock at an effective price
per share lower than the conversion price of the Notes, the conversion rate of the Notes shall be reduced to such lower price.
Until
the Notes are either paid or converted in their entirety, the Company agreed with the Lenders not to sell any securities convertible
into shares of common stock of the Company (i) at a conversion price that is based on the trading price of the stock or (ii) with a conversion
price that is subject to being reset at a future date or upon an event directly or indirectly related to the business of the Company
or the market for the common stock. The Company also agreed to not issue securities at a future determined price.
The
Lenders have the right to require the Company to repay the Notes if the Company receives cash proceeds, including proceeds from customers
and the issuance of equity (including in the Uplist Offering). If the Company prepays the Notes prior to the Maturity Date, the Company
shall pay a 10% prepayment penalty.
On
April 27, 2022, the Company entered into an amendment to the Note (“Amendment to Promissory Note”) issued to a Lender and,
on May 3, 2022, an amendment to the Registration Rights Agreement by and between the Company and the Lender dated as of October 27, 2021
(“Amendment to Registration Rights Agreement”), extending the number of days the Company shall have in order to cause the
registration statement covering the resale of the Common Stock to become effective. For each 30-day extension, the Company agreed to
repay the Lender $25,000 of the principal amount of the Note, without prepayment penalty. The Company has repaid $25,000 to the Lender
on May 3, 2022.
On
August 9 and September 20, 2022, the Company repaid $50,000 to six (6) Lenders and $65,000 to five (5) Lenders, respectively.
For
the nine-month period ended September 30, 2022, the Company recognized interest expenses of the Notes in the amount of US$172,255.
The
following is the summary of outstanding promissory notes as of September 30, 2022:
SUMMARY
OF OUTSTANDING PROMISSORY NOTES
| |
Interest
rate | | |
Principal
Amount | | |
Net
Proceeds | | |
Warrants
Shares | | |
Maturity
Date |
Convertible Note- Talos Victory
(Note 9 (b)) | |
| 8 | % | |
$ | 250,000 | | |
$ | 197,000 | | |
| 200,000 | | |
October 27, 2022 |
Convertible Note-Mast Hill (Note 9 (b)) | |
| 8 | % | |
| 750,000 | | |
| 601,000 | | |
| 600,000 | | |
November 5, 2022 |
Convertible Note-First Fire (Note 9 (b)) | |
| 8 | % | |
| 250,000 | | |
| 197,000 | | |
| 200,000 | | |
November 16, 2022 |
Convertible Note-LGH Note 9 (b)) | |
| 8 | % | |
| 250,000 | | |
| 207,000 | | |
| 200,000 | | |
November 24, 2022 |
Convertible Note -Fourth Man (Note 9 (b)) | |
| 8 | % | |
| 250,000 | | |
| 197,000 | | |
| 200,000 | | |
November 29, 2022 |
Convertible Note-Jeffery Street Note 9 (b)) | |
| 8 | % | |
| 250,000 | | |
| 197,000 | | |
| 200,000 | | |
December 2, 2022 |
Convertible Note -Blue
Lake Note 9 (b)) | |
| 8 | % | |
| 250,000 | | |
| 197,000 | | |
| 200,000 | | |
December 2, 2022 |
Total | |
| | | |
| 2,250,000 | | |
| 1,793,000 | | |
| 1,800,000 | | |
|
Debt Discounts | |
| | | |
| (225,000 | ) | |
| | | |
| | | |
|
Amortization of discounts for the year ended December 31, 2021 | |
| | | |
| 5,550 | | |
| | | |
| | | |
|
Convertible promissory notes payable as of December 31, 2021 | |
| | | |
| 2,030,550 | | |
| | | |
| | | |
|
Repayment of principals for the nine-month period ended September 30,
2022 | |
| | | |
| (115,000 | ) | |
| | | |
| | | |
|
Amortization of discounts for the nine-month
period ended September 30, 202 | |
| | | |
| 19,461 | | |
| | | |
| | | |
|
Convertible promissory
notes payable as of September 30,2022 | |
| | | |
$ | 1,935,010 | | |
| | | |
| | | |
|
*The
Company prepaid $10,000 legal deposit for each note until the repayment of the notes.
b)
Warrants
Accounting
for Warrants
In
connection with the issuance of a convertible promissory notes (see Note 11 (a) in October, November and December, 2021, the Company
also issued seven (7) three-year warrants (the “ Warrants”) to purchase an aggregate of 1,800,000 shares of the Company’s
common stock (the “ Warrant Shares”).
The
Warrants issued to the Lenders granted each of the Lenders the right to purchase up to 200,000 shares of common stock of the Company
at an exercise price of $1.25 per share. However, if the Company closes an Uplist Offering on or before the 180th calendar
date after the issuance date of the Warrants, then the exercise price shall be 125% of the offering price of a share in the Uplist Offering.
If the adjusted exercise price as a result of the Uplist Offering is less than $1.25 per share, then the number of shares for which the
Warrants are exercisable shall be increased such that the total exercise price, after taking into account the decrease in the per share
exercise price, shall be equal to the total exercise price prior to such adjustment.
The
Lenders have the right to exercise the Warrants on a cashless basis if the highest traded price of a share of common stock of the Company
during the 150 trading days prior to exercise of the Warrants exceeds the exercise price, unless there is an effective registration statement
of the Company which covers the resale of the Lenders.
If
the Company issues shares or any securities convertible into shares at an effective price per share lower than the exercise price of
the Warrants, the exercise price of the Warrants shall be reduced to such lower price, subject to customary exceptions.
The
Lenders may not convert the Notes or exercise the Warrants if such conversion or exercise will result in each of the Lenders, together
with any affiliates, beneficially owning in excess of 4.9% of the Company’s outstanding common stock immediately after giving effect
to such exercise unless the Lenders notify the Company at least 61 days prior to such exercise.
On
April 14 and April 27, 2022, two Lenders exercised cashless for 115,540 and 111,972 warrant shares, respectively.
From
August 24 to September 27, 2022, seven Lenders exercised cashless for 1,306,506 warrant shares.
The
fair values of these warrants as of September 30, 2022 were calculated using the Black-Scholes option-pricing model with the following
assumptions:
SCHEDULE
OF FAIR VALUE OF WARRANTS
| |
September
30, 2022 | |
| |
Volatility
(%) | | |
Expected
dividends yield (%) | | |
Weighted
average expected life (year) | | |
Risk-free
interest rate (%) (per annum) |
| |
Common
stock purchase warrants liability as of December 31, 2021(US$) | | |
Changes
of fair value of common stock purchase warrants liability (+ (gains)/- losses(US$) | | |
Common
stock purchase warrants liability as of September 30, 2022 (US$) | |
Convertible
Note- Talos Victory (Note 9 (a)) | |
| 256.7 | % | |
$ | 0.0 | % | |
$ | 2.1 | | |
| 4.22 |
% | |
| 124,756 | | |
| (3,895 | ) | |
| 120,861 | |
Convertible
Note-Mast Hill (Note 9 (a)) | |
| 256.7 | % | |
| 0.0 | % | |
| 2.1 | | |
| 4.22 |
% | |
| 375,156 | | |
| (11,749 | ) | |
| 363,407 | |
Convertible
Note-First Fire (Note 9 (a)) | |
| 256.7 | % | |
| 0.0 | % | |
| 2.1 | | |
| 4.22 |
% | |
| 125,408 | | |
| (3,946 | ) | |
| 121,462 | |
Convertible
Note-LGH Note 9 (a)) | |
| 256.7 | % | |
| 0.0 | % | |
| 2.1 | | |
| 4.22 |
% | |
| 125,664 | | |
| (3,971 | ) | |
| 121,693 | |
Convertible
Note -Fourth Man (Note 9 (ab)) | |
| 256.7 | % | |
| 0.0 | % | |
| 2.2 | | |
| 4.22 |
% | |
| 125,821 | | |
| (3,987 | ) | |
| 121,834 | |
Convertible
Note-Jeffery Street Note 9 (a))3,054 | |
| 256.7 | % | |
| 0.0 | % | |
| 2.2 | | |
| 4.22 |
% | |
| 125,915 | | |
| (3,997 | ) | |
| 121,918 | |
Convertible
Note -Blue Lake Note 9 (a)) | |
| 256.7 | % | |
| 0.0 | % | |
| 2.2 | | |
| 4.22 |
% | |
| 125,915 | | |
| (3,997 | ) | |
| 121,918 | |
Total | |
| | | |
| | | |
| | | |
| Total |
| |
| 1,128,635 | | |
| (35,542 | ) | |
| 1,093,093 | |
(c)
Registration Rights Agreements
Pursuant to the terms of
the Registration Rights Agreement dated as of each contract date of each convertible promissory note, executed between the Company and
each Lender, the Company agreed to file a registration statement with the Securities and Exchange Commission to register the shares of
common stock underlying the Notes and the shares issuable upon exercise of the Warrants within sixty days from the date of each Registration
Rights Agreement. The Company also granted the Lenders piggyback registration rights on such shares pursuant to the Purchase Agreements.
NOTE
10— SHAREHOLDERS’ EQUITY
Ordinary
Shares
The
Company’s authorized number of ordinary shares was 300,000,000 shares with par value of $0.001.
On
December 22, 2020, the Company issued 103,610
shares of common stock to The Crone Law Group, P.C. or its designees for legal services (see Note 11).
On
January 1, 2021, the Company issued an aggregate of 310,830 shares to a third party service provider for consulting services that had
been rendered.
On
April 14 and April 27, 2022, the Company issued cashless warrant shares of 115,540 and 111,972 to two Lenders, respectively. (see Note
9 (b)).
From
August 24 and September 27, 2022, the Company issued cashless warrants shares of 1,306,506 to seven Lenders, respectively. (see Note 9
(b)).
As
of September 30, 2022, the Company had 33,345,541 issued and outstanding shares.
NOTE
11- SHARE BASED COMPENSATION
The
Company applied ASC 718 and related interpretations in accounting for measuring the cost of share-based compensation over the period
during which the consultants are required to provide services in exchange for the issued shares. The fair value of above award was estimated
at the grant date using Black-Scholes model for pricing the share compensation expenses.
On
December 22, 2020, the Board of Directors of the Company authorized the issuance of an aggregate of 103,610 shares and 210,360 warrants
to The Crone Law Group, P.C. or its designees for legal services that had been rendered. The five-year warrants are exercisable at one
cent per share.
The
shares of 103,610 were vested on December 22, 2020 and no warrants were exercised. The fair value of above award was estimated at the
grant date using Black-Scholes model for pricing the share compensation expenses. The fair value of the Black-Scholes model includes
the following assumptions: expected life of 2.5 years, expected dividend rate of 0%, volatility of 43.5% and an average interest rate
of 0.11%.
On
January 1, 2021, the Board of Directors of the Company authorized the issuance of an aggregate of 310,830 shares and 631,080 warrants
to a third party service provider for consulting services that had been rendered. The five-year warrants are exercisable at one cent
per share.
The
310,830 shares of common stock and 631,080 warrants were vested on January 1, 2021 and no warrants were exercised. The fair value of
above award was estimated at the grant date using Black-Scholes model for pricing the share compensation expenses. The fair value of
the Black-Scholes model includes the following assumptions: expected life of 1.5 years, expected dividend rate of 0%, volatility of 215.4%
and an average interest rate of 2.96%.
As
of September 30, 2022, the Company had 841,440 warrants outstanding related to above mentioned services with i) weighted average exercise
price of $0.01; ii) weighted average remaining contractual life of 1.00 years; and iii) aggregate intrinsic value of $0.5 million.
For
the three-month periods and nine-month periods ended September 30, 2022 and 2021, the Company recognized relevant share-based compensation
expense of nil and $1,041,281 for the vested shares, and nil and $2,107,825 for the warrants, respectively
NOTE
12- RISKS AND UNCERTAINTIES
Credit
Risk – The carrying amount of accounts receivable included in the balance sheet represents the Company’s exposure
to credit risk in relation to its financial assets. No other financial asset carries a significant exposure to credit risk. The Company
performs ongoing credit evaluations of each customer’s financial condition. The Company maintains allowances for doubtful accounts
and such allowances in the aggregate have not exceeded management’s estimates.
The
Company has its cash in bank deposits primarily at state owned banks located in the PRC. Historically, deposits in PRC banks have been
secured due to the state policy of protecting depositors’ interests. The PRC promulgated a Bankruptcy Law in August 2006, effective
June 1, 2007, which contains provisions for the implementation of measures for the bankruptcy of PRC banks. The bank deposits with financial
institutions in the PRC are insured by the government authority for up to RMB500,000.
Interest
Rate Risk – The Company is exposed to the risk arising from changing interest rates, which may affect the ability of repayment
of existing debts and viability of securing future debt instruments within the PRC.
Currency
Risk - A majority of the Company’s revenue and expense transactions are denominated in RMB and a significant portion of
the Company’s assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC,
certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates
set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be
processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order
to affect the remittance.
Concentrations
- The Company sells its products primarily through direct customers in the PRC and to some extent, the overseas customers in
European countries and East Asia such as South Korea and Taiwan.
For
the three-month periods ended September 30, 2022 and 2021, five customers accounted for 21.9%, 16.3%, 15.0%, 13.4% and 12.95, and five
customers accounted for 21.3%, 15.5%, 15.4%, 14.0% and 11.4%, respectively, of the Company’s revenue.
For
the nine-month periods ended September 30, 2022 and 2021, six customers accounted for 20.5%, 15.9%, 15.6%, 14.5%, 12.3% and 10.2%, and
five customers accounted for 18.9%, 17.5%, 14.6%, 14.1% and 11.4%, respectively, of the Company’s revenue.
And
the Company’s top ten customers aggregately accounted for 99.1% and 98.1% of the total revenue for the three-month periods ended
September 30, 2022 and 2021, and 99.2% and 96.7% for the nine-month periods ended September 30, 2022 and 2021.
As
of September 30, 2022, five customers accounted for 26.2%, 24.3%, 14.5% and 11.5% of the total accounts receivable balance, respectively.
The
Company purchases its raw materials through various suppliers. Raw material purchases from these suppliers which individually exceeded
10% of the Company’s total raw material purchases, accounted for approximately 47.7% (four suppliers) and 46.3% (four suppliers)
for the three-month periods, respectively, 47.2% (four suppliers) and 25.1% (two suppliers) for the nine-month periods ended September
30, 2022 and 2021, respectively.
NOTE
13 — COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
From
time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated
with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss
contingencies are expensed as incurred.
As
of September 30, 2022, there were no legal proceedings.
Capital
expenditure commitment
On
December 20, 2021, the Company entered into a contract with Shenzhen Municipal Haoyutuo Decoration & Cleaning Engineering Company
Limited to purchase a facility decoration contract of RMB20.0 million (equivalent to US$3.1 million ). As of September 30, 2022, the
Company has prepaid RMB15.0 million (equivalent to US$2.1 million) and recorded as construction in progress (see Note 5) and had a remaining
balance of RMB5.0 million (equivalent to US$0.7 million) to be paid by the end of 2022.
NOTE
14 — REVENUES
The
Company’s geographical revenue information is set forth below:
SCHEDULE
OF GEOGRAPHICAL REVENUE INFORMATION
| |
2022 | | |
2021 | | |
2022 | |
|
2021 | |
| |
Three-Month
Period Ended September
30, | | |
Nine-Month
Period Ended September
30, | |
| |
2022 | | |
2021 | | |
2022 | |
|
2021 | |
| |
US$ | | |
US$ | | |
US$ | |
|
US$ | |
Sales
in PRC | |
$ | 8,159,260 | | |
$ | 7,696,992 | | |
$ | 24,421,569 | |
|
$ | 24,652,526 | |
Sales
in Overseas | |
| | | |
| | | |
| | |
|
| | |
—Republic
of China (ROC, or Taiwan) | |
| 1,851,599 | | |
| 1,785,128 | | |
| 5,708,133 | |
|
| 6,663,678 | |
-South
Korea | |
| 1,578,002 | | |
| 1,618,284 | | |
| 5,144,829 | |
|
| 5,519,484 | |
-Others | |
| 34,156 | | |
| 65,576 | | |
| 95,968 | |
|
| 278,482 | |
Sub-total | |
| 3,463,757 | | |
| 3,468,988 | | |
| 10,948,930 | |
|
| 12,461,644 | |
Total
Revenue | |
$ | 11,623,018 | | |
$ | 11,165,980 | | |
$ | 35,370,499 | |
|
$ | 37,114,170 | |